No. of Recommendations: 6
See, this is the thing.
There are 3 classes of people here...
2) People who have a lot of money in retirement funds. They don't need the SS money in the first place, so there is no particular reason to delay just to get even more money in the future that they don't need. Their heirs cannot inherit their SS money but can inherit their retirement funds, so why deplete the retirement funds?
Lots of reasons. First, the usual disclaimer, everyone's situations are different, taxes are complicated, blah, blah, blah.
But in this particular scenario with early retirees with high retirement balances but who don't need SS income, the main reason to delay is avoiding a large of amount of federal income tax for both you and your heirs by mitigating or avoiding RMDs by doing Roth conversions.
Without Social Security income filling up the lower tax brackets, you have headroom to pay federal income tax on the converted amount at low marginal rates. If you didn't convert, you'd be paying higher marginal rates on the RMDs. Basically, it is tax arbitrage.
Another advantage is the SS tax "torpedo." As you pointed out above, up to 85% of Social Security benefits become taxable once your "Combined Income" (Adjusted Gross Income + Non-taxable Interest + 50% of Social Security) exceeds a threshold. RMDs count towards AGI. Roth distributions do not.
Another advantage is IRMAA avoidance. Again, RMDs can push you into IRMAA income tax brackets.
Finally, it benefits your heirs too. Beneficiaries inheriting a traditional IRA must liquidate the entire balance within 10 years, often during their own peak earning years. Inherited Roth IRAs must also be liquidated in 10 years, but all distributions are completely tax-free to the heirs.