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Tag: retirement planning

6 Reasons to Take Advantage of a Roth Conversion

While I recently outlined reasons to steer clear of a Roth conversion, today I’m flipping the coin to explore when it can be a smart, strategic move for your financial future.

Why Consider a Roth Conversion During Market Downturns

A Roth conversion can be particularly beneficial during market downturns. When the market is down, you’re essentially exchanging a number of shares based on the dollar amount you want to convert from your tax-deferred account (whether it’s an IRA or a 401k) into a Roth.

You’ll have to pay taxes now in exchange for tax-free growth, which is the advantage Roth accounts offer. When markets are down, you can convert more shares with the same dollar amount.

For example, if you were looking to convert $50,000 worth of Vanguard’s Total Index (VTI) back in 2022 (the last bear market), you’d be able to convert an additional 25% worth of shares because the market was down roughly 25% that year. Just a thought, given we had some rough patches this April with the tariff concerns. We could continue to see more volatility in the months ahead.

While we can’t control market volatility, we can control smart tax planning. Let’s jump into the top six reasons you may consider a Roth Conversion in your financial planning strategy.

1. For Accumulators: Backdoor Roth IRA Strategy

The first reason is actually for people who are pre-retirement, or what I call “accumulators.” There are income thresholds for single and married filing jointly to directly contribute to a Roth IRA. If you fall into that category, the Roth conversion or backdoor Roth IRA strategy comes into play.

Essentially, you’ll make a non-deductible contribution into an IRA and then convert those assets into a Roth IRA. There are some tax traps you might fall into (the aggregation rule), so consult with your tax planner or financial planner before making this move. This strategy is available for IRAs, and sometimes, for 401ks as well. Contribution limits are much higher for 401ks than IRAs. If you have this option within a 401k, this could really boost your retirement savings.

2. Tax-Free Growth Long-Term

Reasons 2 through 6 are for individuals nearing retirement who have accumulated substantial savings in tax-deferred IRAs or 401ks.

The second reason is for long-term tax-free growth. If you believe tax rates probably aren’t going down and are more likely to go up or stay the same, then tax-free growth and compounding interest are much more powerful than tax-deferred growth. This could be for legislative reasons, or even simply projecting out your lifetime tax brackets. We know now that the One Big Beautiful Bill Act has made the current brackets permanent. Still, that doesn’t mean YOUR tax bracket might rise over time based on changes in your income or assets.

3. Eliminate or Reduce Required Minimum Distributions

A Roth conversion can eliminate or reduce your required minimum distributions. Required Minimum Distributions (RMDs) are mandatory withdrawals from traditional retirement accounts (IRAs, 401ks, 403bs, TSPs, 457bs, etc.) that the IRS requires once you reach a certain age. The beginning age is currently 73 if you were born before 1960, or 75 if you were born in 1960 or later. RMDs could potentially push your income into higher tax brackets later in retirement when spending actually might go down. Furthermore, if you don’t need all that income, it forces you to realize it anyway to avoid the 25% penalty for a missed RMD.

4. Save Money on Medicare Premiums

Many people don’t realize that when you sign up for Medicare, you might find yourself paying MORE for Medicare Part B and D. Part A is free, and everyone has the same base premium for B and D. However, the more money you make in retirement, the chances of triggering an “IRMAA” surcharge goes up.

IRMAA stands for Income-Related Monthly Adjustment Amount. There are 5 different premium tiers, and each tier increases your IRMAA surcharge. You can also look at it like an excise tax. The more you’ve saved in tax-deferred vehicles (401ks and IRAs), the higher those RMDs might be. More income from RMDs means your Medicare premiums may go up.

5. Reduce the “Surviving Spouse’s Tax Penalty”

The likelihood that a married couple passes away in the same year is very low. Most of the time, women outlive men, or one spouse outlives the other by many years. This is especially relevant if there is a significant age gap between spouses.

Filing jointly is much more tax-advantaged for most people. The surviving spouse will have to switch to filing single, typically the year following the initial spouse’s passing. This could result in pushing the surviving spouse into a much higher tax bracket than when they could file jointly.

Taking this into consideration to ensure you’re not placing your surviving spouse in an unfair or unfavorable tax situation upon your passing is a compelling reason to convert assets from traditional to Roth.

6. Address Changes from the SECURE Act

With the SECURE Act going into effect at the end of 2019, we’re seeing the largest acceleration of taxes on retirement assets that we’ve ever experienced. Essentially, the stretch IRA is eliminated for most non-spousal beneficiaries. With the stretch IRA, beneficiaries could “stretch” their IRA withdrawals over THEIR life expectancy. However, the SECURE Act now requires most beneficiaries to liquidate the entire retirement account by the end of the 10th year. This could result in pushing your heirs into an unfavorable tax bracket, especially if they are successful in their own right. We hear all the time that our clients’ children are making more than they ever made! Couple this with large IRAs or 401ks as an inheritance in their peak earning years, and you can see the potential tax trap this brings about. We call it “The Death Tax Trap of 401ks.”

This acceleration of taxes is a big reason to convert from tax-deferred accounts to tax-free accounts. When Roth accounts pass to the next generation, the beneficiaries can enjoy tax-free distributions of the assets instead of tax-deferred distributions.

Understanding the Roth IRA Conversion Process

The concept of a Roth Conversion is essentially to pay the tax now as opposed to deferring those taxes in an IRA or 401k. If you follow the appropriate 5-year rules, everything that grows and compounds in that account, along with the withdrawals, should be tax-free in retirement.

Compare that to a traditional IRA or traditional 401k. These plans give you a tax deduction upfront, but all of that compounding interest and distributions in the back end are taxed as ordinary income in retirement.

Many of my clients over 55 have accumulated the majority of their retirement assets in tax-deferred vehicles, such as 401(k)s and/or IRAs. They may be concerned about the future direction of taxes, particularly given the funding levels of Medicare, Medicaid, and Social Security.

The general concept is: does it make sense to pay taxes now at a potentially lower rate and enjoy tax-free compounding as opposed to tax-deferred compounding going forward?

The Tax Trap of Traditional 401(k)s and IRAs

The impact of Required Minimum Distributions are oftentimes one of the biggest tax traps of 401ks and IRAs. Because our clients were diligent savers during their working years, they accumulated substantial assets in 401(k) plans and IRAs. When they turn 73 or 75, they’re forced to take out a certain percentage of those retirement accounts each year.

As your life expectancy shortens, the amount you’re required to take out increases. You start out at a little under 4%, and by the time you get to 90, you’ll be taking out north of 8% of your retirement account, whether you need it or not.

Think about what that can do to your taxable income, Medicare premiums, and ultimately, how those assets are passed on to the next generation. This tax trap is what we’re trying to solve well before clients hit that magic age.

Planning for Longevity in Retirement

More and more people are living longer, often into their 90s. The life expectancy of a 62-year-old female includes a 30% chance of living until 96. When planning with clients over 55 or 60, we may be looking at a retirement of 30 years or more, even longer than their working years.

You must consider this in light of the high inflation we have experienced these past few years. The cost of goods going up over that retirement period on a potentially fixed income is worrisome for many clients. That’s what we try to plan for and mitigate inflation risk coupled with longevity risk.

The Retirement Red Zone

I call the period ten years before you retire and the ten years after you retire the “Retirement Red Zone.” Decisions are magnified, and mistakes are magnified if you make the wrong move.

From an investment perspective, that’s important, especially during volatile times. Certainly, from a tax perspective, which also contributes to the long-term rate of return on your portfolio. This is something I aim to help my clients with as they prepare.

Strategic Planning for Retirement Success

While nobody can predict the future of taxes, you can take the known variables and project out your estimated lifetime tax rates. You will find that throughout retirement, there could be some opportunistic times when your income goes way down. If you’re making strategic moves during that time frame, such as Roth conversions, that planning can help position your retirement assets for better long-term growth and tax efficiency.

Remember, the planning doesn’t stop after retirement, it just changes. Whether you are on the brink of retirement or you’ve been retired for several years, having good guidance at every stage of the process is crucial for achieving financial peace and security in retirement.

Take a deeper dive into this topic by listening to Episode 10 of The Planning for Retirement Podcast. This is for general education purposes only and should not be considered as tax, legal or investment advice. At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.

If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

7 Reasons Not to Do a Roth Conversion

I’ve never met anyone who wants to overpay the IRS. As a result, one of the number one topics we discuss with clients is how to reduce their lifetime tax bill. More specifically, whether or not they should consider a Roth Conversion with some of their IRA dollars.

Before we talk about the seven reasons that might cause you to delay, reduce, or reconsider doing a Roth conversion, let’s look at some big news brewing in Washington related to taxes on Social Security.

Social Security has a complicated formula to determine how much of your benefit will be included in your taxable income. On the low end, your entire benefit could be tax-free (0% included in taxable income). On the high end, up to 85% of your Social Security benefit could be taxable.

Senior Citizens Tax Elimination Act

Congressman Thomas Massey from Kentucky, along with 29 Republican co-sponsors, has introduced the Senior Citizens Tax Elimination Act. To provide some context, prior to 1986, Social Security benefits weren’t taxable at all. In 1986, Social Security implemented revisions and created the provisional income formula that determines how much of your benefit is included in taxable income.

Massey’s bill would essentially repeal the inclusion of Social Security benefits in taxable income altogether. This would also include tier one railroad benefits (pensions from working at the railroad). The bill was first introduced last year, but now it’s legitimate. It’s in the House and seems to have a decent chance of passing.

However, there are costs associated with implementing this bill. According to the Committee for Responsible Government, this is estimated to cost taxpayers about $1.8 trillion over the next decade. When we couple this with Social Security’s projected insolvency date of around 2033-2034, it raises questions about funding.

Currently, 80% of Social Security benefits are funded by payroll taxes from current workers. The Social Security trust fund supplements the remaining 20%. If benefits become tax-free, this could accelerate the insolvency date.

So, how will they pay for this bill? My crystal ball says taxes will increase in some way to fund the deficits projected for Social Security and Medicare.

Why is this relevant to our Roth conversion discussion? Because, while we know what taxes look like today, it’s virtually impossible to be 100% certain about future tax rates.

What is a Roth Conversion?

A Roth conversion involves moving or converting funds from a tax-deferred vehicle (like a traditional IRA, 401(k), 403(b), or TSP plan) into a tax-free vehicle. In exchange for doing this, you elect to pay the taxes now.

Why would you do this? At one point, you believed deferring taxes was the way to go, or maybe you didn’t have access to a Roth account. This is pretty common—15-20 years ago, many employers didn’t offer Roth 401(k) plans. But now you have the ability to convert some of those assets to Roth.

The benefit of a Roth account is tax-free growth going forward, as opposed to tax-deferred growth. But there are situations where converting might not be the best strategy.

1. You’re in a Higher Tax Bracket Today Than You Will Be in the Future

The first reason to reconsider a Roth conversion is if you’re currently in a higher tax bracket than you expect to be in the future. There are several scenarios where this might happen:

When you retire, your W-2 income or self-employment income disappears. Your only income might be capital gain distributions, dividends, interest, a small pension, or IRA distributions. If your tax bracket will drop substantially in retirement, it might make sense to wait until you enter what we call the “Roth conversion window.” This window is after retirement, but before you start taking Required Minimum Distributions (RMDs) and/or Social Security.

Your income might be temporarily high due to things like

  • Selling a business, stock, or rental property
  • Receiving a large bonus
  • Inheriting money

Doing a Roth conversion during these high-income years could push you into an unnecessarily higher tax bracket.

You might believe taxes will decrease in the future due to legislative changes, making it beneficial to wait for potential tax cuts before converting.

In short, if you expect your income bracket to drop at some point, it might be worth evaluating conversions at that time instead of now.

2. You’re Leaving a High-Income Tax State for a Low or No-Income Tax State

According to the Tax Foundation, state income taxes significantly influence net migration in the U.S. The top third of states with positive net migration have an average state income tax of about 3.5%. The bottom third average nearly double that at 6.7%.

I don’t believe you should move to a state in retirement solely because of taxes. However, if you’re planning to move from a high-tax state like New Jersey, New York, or California to a low or no-income tax state, you might consider waiting to do Roth conversions until after your move.

You could potentially benefit from both a lower federal bracket at retirement and little to no state income tax, maximizing your tax savings on the conversion.

It will be interesting to see how migration patterns evolve as companies bring employees back to in-person work. For retirees with the flexibility to move anywhere, taxes will likely remain an important consideration.

3. Your Heirs Are in Lower Tax Brackets

The SECURE Act, passed at the end of 2019, eliminated the “stretch IRA” for most beneficiaries. Previously, individuals who inherited an IRA could stretch distributions over their life expectancy. Now, most non-spouse beneficiaries must liquidate the account within 10 years.

This applies to both traditional IRAs and Roth accounts. The key difference is that Roth account distributions during those 10 years are tax-free to beneficiaries, while traditional IRA distributions are fully taxable.

If your beneficiaries are in a very low tax bracket, while you are in a higher tax bracket, there could be an argument for not converting. For example, if you’re in the 24% or 32% bracket due to Social Security, a pension, and investment income, while your children are in the 10% or 12% bracket, it might make more sense to leave those assets to your heirs and let them pay taxes at their lower rate.

The challenge with this approach is that it requires knowing exactly when you’ll pass away and what tax bracket your children will be in at that time. Your 25-year-old child who’s currently in graduate school with no income might eventually have high earning potential or start a successful business, putting them in a higher tax bracket than you.

Additionally, even if your beneficiaries are in a relatively low tax bracket, inheriting a large IRA could push them into a higher bracket during the 10-year distribution period. For example, if your IRA is worth $2 million, your beneficiaries would need to distribute about $200,000 annually over 10 years, potentially pushing them into a much higher tax bracket regardless of their current income.

You should also consider the distribution of your assets between taxable, tax-deferred, and tax-free accounts when making this decision.

4. Hidden Taxes Could Reduce the Benefit of Converting

Any Roth conversion will increase your taxable income in the year you do the conversion, even though it doesn’t put cash in your bank account. This can trigger various “hidden taxes” based on calculations like modified adjusted gross income (MAGI), taxable income, or provisional income.

Here are some examples:

IRMAA Surcharge: The Income-Related Monthly Adjustment Amount applies once you’re Medicare eligible. While Medicare Part A is free, Part B has a premium (about $185 for 2025). Part D depends on your chosen drug plan. If your income exceeds certain thresholds, you’ll pay additional surcharges for both Part B and Part D. These surcharges can range from $1,000 to over $6,000 per year per person.

ACA Premium Tax Credits: If you retire before 65 and use the Affordable Care Act for health insurance, you might be eligible for premium tax credits based on your modified adjusted gross income. Roth conversions could reduce these credits.

Net Investment Income Tax: If your MAGI exceeds $250,000 (married filing jointly) or $200,000 (single), there’s an additional 3.8% tax on investment income like dividends, interest, and rental income.

Capital Gains Taxes: If you’re married filing jointly and your taxable income is below $96,700 for 2025, you don’t pay any tax on long-term capital gains. A Roth conversion could push you above this threshold.

Social Security Taxation: As mentioned earlier, between 0% and 85% of your Social Security benefits could be taxable depending on your provisional income. Roth conversions can increase this percentage.

While these hidden taxes aren’t necessarily reasons to avoid Roth conversions entirely, they should factor into your decision about timing and amount.

5. You’re Planning to Donate to Charity During Your Lifetime or at Death

Traditional IRAs are some of the best accounts to donate to charity. If you convert all your tax-deferred assets to Roth, you lose this potential tax benefit.

One powerful strategy is the Qualified Charitable Distribution (QCD). Once you turn 70½, you can donate up to $107,000 (in 2025) directly from your IRA to charity without recognizing an taxable income. What makes this even more powerful is that once you begin taking Required Minimum Distributions (RMDs), you can reduce your RMD dollar-for-dollar up to that cap.

For example, if your RMD is $50,000 and you typically donate $30,000 to charity, you could do a $30,000 QCD directly from your IRA. This would reduce your RMD to $20,000, essentially making that $30,000 completely tax-exempt—even better than a tax deduction.

Similarly, if you’re planning to leave money to charity at death, your traditional IRA is a great asset to use. While your non-spousal beneficiaries (typically children or nieces/nephews) will have to pay taxes as they withdraw from the inherited IRA over the 10-year period, charities don’t pay any taxes on these distributions.

This doesn’t mean you shouldn’t convert at all, but you might consider not converting as much or as aggressively if charitable giving is part of your plan.

6. You’re Planning to Self-Fund for Long-Term Care Costs

Long-term care is one of the most significant risks retirees face today. The uncertainty lies in whether you’ll need care, and if so, for how long—six months or ten years? The costs can be substantial, often exceeding six figures annually.

Some people buy long-term care insurance, while others plan to use their own assets. If you’re in the latter group, there’s an interesting tax angle to consider. While IRA distributions are taxable, there’s a deduction if your medical costs exceed 7.5% of your adjusted gross income. These expenses can be added to your itemized deductions.

If you need long-term care later in life, it’s almost certain your expenses will exceed that 7.5% threshold, given the high costs involved. If you have an IRA you can tap into to pay for care, you might be able to deduct some of those distributions because of the medical expense deduction.

While this deduction may not offset the entire tax on the distribution, it can be significant enough to argue against converting all of your IRA to Roth.

7. You Don’t Have the Cash to Pay the Taxes

The traditional approach to paying for Roth conversion taxes is to use cash on hand from a savings or checking account, or to increase withholding from sources like Social Security or a pension to offset the additional taxes.

If these aren’t options—if you don’t have the cash or need your income from other sources—you may have to use funds from your IRA to pay the tax. If you’re younger than 59½, this isn’t advisable because you’ll face a 10% early withdrawal penalty.

Even if you’re over 59½, using money from your IRA to pay the taxes leaves less money invested that could otherwise grow tax-deferred. This may not be ideal depending on your time horizon and the breakeven point of the Roth conversion.

Your plan should strongly favor Roth conversions for it to make sense to pay the tax out of the IRA. While there are cases where this works (I have a client for whom we’re doing exactly this), if you don’t have the cash and the case for Roth conversion isn’t compelling, you might want to pause or avoid the conversion altogether.

Final Thoughts on Roth Conversion Decisions

Understanding when a Roth conversion makes sense requires careful analysis of your current situation, future expectations, and overall financial goals. While Roth conversions can be powerful tools for retirement planning, they aren’t right for everyone in every situation.

Remember that tax laws and personal circumstances change over time, so regularly reviewing your retirement and tax planning strategy is essential for long-term success.

If you’re approaching retirement and wondering if you should do a Roth Conversion, check out Episode 66 of The Planning for Retirement Podcast. Consider working with a financial advisor who specializes in retirement income planning. They can help you analyze your specific situation and develop a claiming strategy that aligns with your overall financial goals.

At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.

If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

This is for general education purposes only and should not be considered as tax, legal or investment advice.




9 Reasons to Consider Delaying Social Security Benefits

You’ve probably heard financial experts advising people to claim Social Security as early as possible. They say things like:

  • “You don’t know how long you’ll live.”
  • “Take it now while you’re young and healthy.”
  • “Social Security might go bankrupt.”

But what if I told you that for high-net-worth retirees, claiming early could cost you several hundred thousand dollars in lost income and negatively impact your investment portfolio over time?

In this article, we’re going to dive into nine compelling reasons why you might consider delaying your Social Security benefits as long as possible. This advice is particularly relevant for individuals over 50 who have accumulated at least a million dollars in retirement savings.

The Current Economic Context

Before we dive into our main topic, it’s important to note some significant economic developments that could impact retirement planning. As of July 2025, all three major credit rating agencies have downgraded US credit from AAA to AA. This downgrade stems from rising national debt (currently at $36 trillion), large annual deficits, and higher borrowing costs for the government.

For retirees, this has several implications:

  1. Bond yields have increased, offering higher interest income on new issues
  2. Existing bonds may have decreased in value
  3. There’s increased volatility in fixed-income investments

These factors make your Social Security claiming strategy even more critical as part of your overall retirement plan.

Social Security Basics: What You Need to Know

Before discussing claiming strategies, let’s review some Social Security fundamentals:

  • Eligibility: You need 40 credits (typically achieved by working for 10 years) to qualify
  • Primary Insurance Amount (PIA): The benefit you’ll receive at full retirement age
  • Full Retirement Age: For most people born after 1960, this is age 67
  • Early Claiming: You can claim as early as 62, but with a reduction of up to 35% from your PIA
  • Delayed Claiming: For each year you delay beyond full retirement age (up to age 70), your benefit increases by 8%

In 2025, the average monthly Social Security benefit is about $1,840 across all recipients, with retirees receiving slightly more at around $1,900 per month. However, if you’ve had above-average earnings throughout your career, your benefits could be significantly higher.

The maximum possible monthly benefit at full retirement age is over $4,000. If claimed early at 62, the maximum is about $2,800, while delaying until 70 could provide up to $5,100 per month. For a married couple with two high earners, this could mean a combined monthly benefit of $8,000 to $10,000, a substantial fixed income stream.

Nine Reasons to Consider Delaying Social Security

1. You or Your Spouse Are Still Working

If you or your spouse continues working, whether part-time or full-time, this income might cover your basic necessities. You can supplement this with portfolio withdrawals if needed.

Additionally, if you claim Social Security while still working before reaching full retirement age, you’ll be subject to the retirement earnings test. This means Social Security will reduce your benefits if your wages exceed certain thresholds. While these reductions aren’t permanent (you’ll receive adjustments later), delaying benefits while working can simplify your financial situation.

2. Higher Guaranteed Monthly Benefit

This is perhaps the most obvious reason to delay. By waiting until age 70 instead of claiming at 62, you can increase your monthly benefit by approximately 77% (avoiding the 35% reduction at 62 and gaining 24% from delayed retirement credits between 67 and 70).

Example

If your primary benefit amount at 67 is $3,000, claiming it at 62 would reduce it to approximately $1,950, while waiting until 70 would increase it to approximately $3,720 per month. That’s a difference of $1,770 per month or $21,240 per year!

Of course, by delaying, you will be forgoing benefits for several years. The break-even point—where the cumulative benefits from delaying surpass what you would have received by claiming earlier—typically occurs around age 83. If you live beyond this age, delaying will have provided greater lifetime benefits.

3. Longevity Insurance

Social Security functions similarly to an annuity, providing guaranteed income for life. This “longevity insurance” becomes increasingly valuable the longer you live.

According to Social Security’s actuarial tables, a 60-year-old male today has a life expectancy of 80.4 years, while a female has a life expectancy of 83.5 years. However, many high-net-worth individuals have access to better healthcare and tend to live longer than these averages.

By delaying Social Security, you’re essentially purchasing a larger “annuity” that increases with inflation each year through cost-of-living adjustments (COLAs). Unlike private annuities, which may not include inflation protection, Social Security benefits are adjusted annually to keep pace with the Consumer Price Index.

4. Spousal and Survivor Benefits

For married couples, delaying benefits can significantly impact the financial security of both spouses.

While spousal benefits (up to 50% of the primary earner’s benefit at full retirement age) cannot be increased by delaying beyond full retirement age, survivor benefits can be. If the higher-earning spouse delays claiming until 70 and then passes away, the surviving spouse can step up to that higher benefit amount.

Example

Let’s say that Jack’s benefit at full retirement age is $4,000 per month, and Jill’s is $2,500. Jack decides to delay receiving benefits until age 70, which increases his benefit to $5,000 per month. When Jack passes away, Jill will receive $5,000 instead of $4,000. This provides significant additional income protection for the surviving spouse.

5. Tax Efficiency

Social Security benefits may be partially taxable depending on your “combined income” (adjusted gross income + tax-exempt income + half of your Social Security benefits):

For single filers:

  • Below $25,000: 0% taxable
  • $25,000-$34,000: Up to 50% taxable
  • Above $34,000: Up to 85% taxable

For married filing jointly:

  • Below $32,000: 0% taxable
  • $32,000-$44,000: Up to 50% taxable
  • Above $44,000: Up to 85% taxable

By delaying Social Security and strategically managing your income during the “Roth conversion window” (the period between retirement and Required Minimum Distribution age), you might be able to convert traditional IRA assets to Roth while keeping your tax bracket lower. Then, when you start Social Security at 70, a smaller portion (or potentially none) of your benefits might be subject to taxation.

6. Maximizing Legacy

While claiming early and investing those benefits might seem like a good strategy for maximizing your legacy, delaying can actually be more effective if you live a long life.

Yes, delaying Social Security means higher portfolio withdrawals in the short term. However, once you start receiving the higher benefit amount, your lifetime withdrawal rate decreases. Over a 15-25 year retirement, this can result in greater portfolio preservation and a larger inheritance for your heirs.

In one case study, a client with a $1 million portfolio who delayed claiming Social Security saw their portfolio initially dip but then recover significantly. By year 22 (around age 84), their portfolio value exceeded what it would have been had they claimed early, ultimately leaving a larger legacy.

7. Peace of Mind

The simple psychological benefit of having a higher guaranteed income stream shouldn’t be underestimated. Many retirees sleep better knowing they have a substantial, inflation-protected income source that isn’t dependent on market performance.

This peace of mind factor is why many people work longer than financially necessary—they want to maximize their guaranteed income in retirement.

8. Health Savings Account (HSA) Eligibility

This is a more technical consideration, but essential for those with HSAs. Once you enroll in Medicare at 65, you can no longer contribute to an HSA, even if you’re still working and covered by a qualified employer plan.

When you begin collecting Social Security after 65, you’re automatically enrolled in Medicare. If you plan to work past 65 and want to continue contributing to an HSA, delaying Social Security is necessary.

9. Flexibility

Deciding to delay Social Security doesn’t lock you in permanently. If you initially plan to delay until 70 but retire into a market downturn, you can start benefits earlier than planned to reduce pressure on your investment portfolio.

This flexibility allows you to adjust your strategy according to changing market conditions, health developments, or other life circumstances.

Real-World Impact: A Case Study

Let’s look at a real example of how different claiming strategies affect lifetime benefits. For a couple we’ll call Jack and Jill, we analyzed three scenarios:

  • Both claiming at 62
  • Both claiming at full retirement age (67)
  • Both claiming at 70

Assuming Jack lives to 85 and Jill to 90, with a 2% annual cost-of-living adjustment:

  • Claiming at 70: $2.3 million in lifetime benefits
  • Claiming at 62: $1.8 million in lifetime benefits

That’s a $500,000 difference in favor of delaying!

Making Your Decision

Every Social Security claiming decision is unique. There’s no one-size-fits-all approach, and hundreds of different claiming scenarios exist based on your specific circumstances.

Don’t let emotions or pessimistic assumptions about the system drive your decision. While concerns about Social Security’s future are valid, making claiming decisions based on fear rather than analysis could cost you hundreds of thousands of dollars.

Your Social Security strategy should be coordinated with other aspects of your retirement plan, including:

  • Your investment portfolio strategy
  • Tax planning
  • Healthcare costs
  • Spousal considerations
  • Legacy goals

For high-net-worth individuals, the decision is particularly nuanced. While you may not “need” Social Security to survive, optimizing this benefit can significantly enhance your retirement security and legacy planning.

Next Steps

If you’re approaching retirement and wondering if you should delay Social Security, check out Episode 79 of The Planning for Retirement Podcast.

At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.

If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

This is for general education purposes only and should not be considered as tax, legal or investment advice.

9 Reasons to Consider Claiming Social Security Benefits Early

The conventional wisdom about Social Security has long been clear: delay claiming as long as possible to maximize your lifetime benefits. Financial calculators, planning tools, and many advisors default to this recommendation. But what if this one-size-fits-all approach isn’t actually the best strategy for you?

As a financial planner, I look beyond the standard advice to consider each client’s unique circumstances. While delaying until age 70 maximizes the monthly benefit amount, there are numerous scenarios where claiming earlier might better serve your financial and personal goals.

In this article, we’ll explore nine compelling reasons why you might want to claim Social Security benefits earlier than conventional wisdom suggests. Let’s start with some basics.

Understanding the 2025 Social Security Landscape

Before diving into claiming strategies, let’s review the current Social Security environment in 2025:

  • A 2.5% Cost-of-Living Adjustment (COLA) has been implemented
  • The average monthly retirement benefit has increased to $1,976
  • The earnings test threshold has been raised to $23,400
  • The worker-to-beneficiary ratio stands at 2.7 workers per beneficiary
  • Trust fund depletion is projected for 2033 without legislative changes

With these updates in mind, let’s examine when claiming Social Security early might make sense for you.

1. Limited Life Expectancy

Social security claiming age considerations should include health status and family longevity.

The default assumption in most financial planning tools is longevity. These tools often project to age 90, 95, or beyond. However, if your life expectancy is shorter due to health conditions or family history, claiming earlier often makes mathematical sense.

The breakeven point between claiming at 70 versus claiming earlier typically falls between ages 78 and 82. If your life expectancy doesn’t suggest you will reach that age, you may collect more total benefits by claiming earlier. This isn’t about being pessimistic—it’s about being realistic and maximizing the total benefit based on individual circumstances.

2. Immediate Cash Flow Needs

Deciding when to claim social security benefits should factor in immediate cash flow requirements. Simply put, some people need the income now. While creating a comprehensive retirement income plan is ideal, Social Security can provide a reliable income stream when you lack other liquid assets or don’t want to draw down your investment portfolios too quickly.

Social Security essentially functions as an annuity, providing a guaranteed income. If you are concerned about market volatility or need predictable income, starting benefits early can create financial stability and peace of mind.

3. The Start-Stop Strategy Advantage

Many clients are unaware that they can claim Social Security benefits early and then suspend them when they reach full retirement age (currently between 66 and 67). This “start-stop” approach allows you to:

  • Begin receiving benefits during an unexpected early retirement
  • Test the waters of retirement without fully committing
  • Suspend benefits if you return to work
  • Earn delayed retirement credits of 8% annually from suspension until age 70

This strategy provides flexibility if your work and retirement plans are in flux, allowing you to adapt your claiming strategy as your situation evolves.

4. Legacy Planning Considerations

If leaving a financial legacy is a priority for you, the analysis must go beyond just cumulative Social Security benefits. Many online calculators only consider the breakeven point of lifetime Social Security payments, missing a crucial factor: portfolio preservation.

Consider this scenario:

A client who delays Social Security until 70 might need to withdraw 8-9% annually from their portfolio during those delay years. Conversely, a client who claims at 65 might only need to withdraw 4-5% annually. The lower withdrawal rate gives the portfolio a better chance to grow, potentially preserving more wealth for heirs.

The proper analysis should examine not just when Social Security benefits break even, but when the investment portfolio recovers from the higher early withdrawals. In some cases, this portfolio preservation aspect often tilts the scales in favor of earlier claiming. 

5. Market Volatility Protection

Market conditions significantly influence the decision of when to claim Social Security benefits. Claiming early may provide stability during market downturns.

Imagine retiring during a bear market, such as 2008, 2020, or 2022. Your portfolio has already taken a hit, and now you need to start withdrawals.

If you’re delaying Social Security, you might need to withdraw 8% or more from a diminished portfolio, potentially causing permanent damage to your retirement sustainability. Claiming Social Security during market volatility can reduce pressure on the investment portfolio, allowing it time to recover.

This strategy can be particularly effective when combined with the start-stop approach mentioned earlier. Clients can claim benefits during market downturns, then suspend when markets recover and they reach full retirement age.

6. No Spousal Benefit Concerns

For married couples, it’s generally advisable to delay the higher earner’s benefit, especially if longevity is expected. This maximizes the survivor benefit, as the surviving spouse will receive the higher of the two benefits upon the death of their spouse.

However, if you have the lower benefit or are single, this consideration doesn’t apply. In these cases, claiming earlier might be more sensible, especially if other factors, such as portfolio preservation or immediate income needs, come into play.

7. Hedging Against Future Benefit Changes

Some people are worried about potential future cuts to Social Security benefits. The Social Security trust fund is projected to be depleted by 2034. At this point, only about 80% of projected benefits would be covered by ongoing payroll taxes if no changes are made.

Over 50% of retirees depend on Social Security for a significant portion of their income. This means that it’s highly unlikely the Social Security benefits program will be eliminated entirely. Likely solutions to the funding gap include increasing the Social Security wage base cap (currently around $176,000) or slightly raising the payroll tax rate.

Still, some people prefer to “get theirs” now, while benefit payouts are certain. This is more of an emotional reaction than a mathematical decision. However, if you are concerned about potential means testing or benefit reductions, claiming earlier can be a reasonable hedge.

8. Self-Investment Opportunity

Some financially savvy people prefer to claim Social Security benefits early and invest those payments themselves. This approach can make sense if you:

  • Have aggressive investment strategies
  • Are comfortable with market volatility
  • Have specific investment opportunities with potential for higher returns
  • Value liquidity and control over their assets

By claiming early and investing the proceeds, you build assets on your own balance sheet rather than waiting for potentially higher future payments. These self-directed investments can be passed on to heirs, unlike Social Security benefits, which generally terminate upon the death of the surviving spouse.

9. Unlocking Benefits for Dependents or Spouses

An often-overlooked reason to claim Social Security benefits earlier involves dependent or spousal benefits. Your spouse cannot claim spousal benefits until you claim your own benefit. This is particularly important if:

  • Your spouse has limited or no Social Security credits of their own
  • You have dependent children under 18 (or still in high school)
  • Your spouse is caring for dependent children

Dependent children can receive up to 50% of the primary amount (the benefit at full retirement age), but only once the primary earner claims their benefit. For clients with younger children or those in second marriages later in life, this consideration can be particularly significant.

Strategic Considerations for Couples

Social security break-even analysis should include portfolio effects, not just lifetime benefit totals. For married couples, coordinated claiming strategies are essential. Here are a few key approaches to consider:

  1. Lower-earner claims early, higher-earner delays: This provides immediate income while maximizing the eventual survivor benefit.
  2. Survivor benefit optimization: If one spouse passes away, the survivor can receive the higher of the two benefits. Delaying the higher earner’s benefit increases the survivor’s benefit.
  3. Spousal benefit coordination: A spouse can receive up to 50% of their partner’s primary insurance amount at full retirement age (less if claimed early).

Remember that the “file and suspend” and “restricted application” strategies were largely eliminated by the Bipartisan Budget Act of 2015, but coordinated claiming strategies remain valuable for married couples.

Key Factors:

Developing effective social security claiming strategies requires understanding your unique situation. When deciding whether to claim Social Security benefits early, consider these essential elements:

  1. Health status and family longevity: Be realistic about life expectancy based on health conditions and family history.
  2. Financial need: Assess immediate income requirements versus long-term maximization.
  3. Employment status: Consider whether continued work is likely or possible.
  4. Marital status: Evaluate spousal and survivor benefit implications.
  5. Other retirement resources: Analyze how portfolio withdrawals interact with Social Security timing.
  6. Market conditions: Factor in current and expected market performance.
  7. Legacy goals: Consider the impact on wealth transfer objectives.
  8. Risk tolerance: Assess comfort with market volatility versus guaranteed income.

The most important advice? Don’t analyze Social Security claiming in isolation. It must be evaluated within the context of a comprehensive retirement income plan that considers all aspects of your financial situation.

Personalized Strategies Win

The “right” Social Security claiming strategy isn’t universal—it’s personal. While delaying benefits works mathematically for those with longevity, many real-world factors can make earlier claiming the optimal choice for you. For a deeper dive into claiming Social Security benefits early, check out Episode 68 of The Planning for Retirement Podcast.

Are you approaching retirement and feeling overwhelmed by the decision of when to claim Social Security? You don’t have to navigate the Social Security landscape alone.

At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.

If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

This is for general education purposes only and should not be considered as tax, legal or investment advice.

Ep. 51: Artificial Intelligence & Bitcoin: Should these Emerging Technologies Have a Place in Your Investment Portfolio? (w/Brian Bonewitz, CFA)

Are you approaching retirement and worried about the impact of Artificial Intelligence (AI) on the future of your job?  What about the impact of AI on the financial markets?  And lastly, do Bitcoin and other cryptocurrencies have a place in a well-diversified investment portfolio?

I hope you enjoy my interview with Brian Bonewitz.  Brian is an AI consultant, CFA holder, and has a unique perspective on AI, digital assets, and the impact they have on investing for retirement.

Personally, I believe the mainstreaming of Bitcoin in 2024 is likely to cap some of the upside potential, but also it reduces the downsize given some of the world’s largest asset managers are now substantial stakeholders in crypto assets.

To each their own, but I believe a decision should be made one way or the other, and likely sooner rather than later.

-Kevin Lao

Connect with me here:

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Links Referenced in Episode:

  • ⁠⁠The godfather of AI sound alarm about potential dangers of AI
  • Digital Assets (IRS website)
  • 6 Things to know about Wash-Sale Rules
  • Michael Saylor on Bitcoin
  • Coinbase
  • Brian Bonewitz on Linkedin
  • Rafa.ai

⁠⁠⁠⁠Are you interested in working with me 1 on 1?⁠ 

⁠Click this link to fill out our Retirement Readiness Survey

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