creative way to (partially) address Soc. Sec. projected insolvency

[Rapid Robert]

I just read a perhaps bizarre proposal to get taxpayers to voluntarily forego their Soc. Sec. benefits, in exchange for an income tax benefit.

Sorry I don't have the link handy, I can probably find it again but it's better maybe if I just try to explain it from memory -- to see how easy it is to understand and explain.

The basic idea is, taxpayer (each spouse on a joint return) has the option, one year at a time, to ignore RMDs from their retirement plans in exchange for not receiving their Soc. Sec. benefit. So for the taxpayer, the taxable income for the year is reduced by both the RMD and the 85% of Soc Sec. that is taxable. This would obviously help high income taxpayers the most, given not only progressive income tax brackets, but IRMAA, etc. In other words, the folks who complain about having to take their RMDs, and who don't really need Soc. Sec. to afford their lifestyle. For the other side, well that is where the math wasn't written out in the article I read. Is this a net revenue increase or decrease for the government?

Under this plan, RMDs are simply deferred, so the tax is still due someday, perhaps to the heirs. And there would be an annual election to opt in or opt out. Opting out means you go back to having RMDs and also to receiving your Soc. Sec. (but without the COLAs arising during your period of no receipts).

[kathyc2]

I'm assuming you are talking about this? https://www.kiplinger.com/retirement...and-defer-rmds

This has to be one of the dumbest things I've ever read. Shame on Kiplinger's for even publishing it.

Take as an example a single person with 40K is SS benefits and an RMD of 175K. FIT on the total would be 42K. So, someone would forego benefits to save 2K? Someone, sometime is going to pay tax on the 175K and it's going to be more than 2K.

The article goes on to say it would be beneficial for someone over 100K taxable income. SS of 35K and RMD of 85K would put taxable income around 100K. Tax would be around 18K. Net loss of 17K. Dude must have been smokin the wacky weed to come up with this.

[Dude]

Just a thought but in return for delaying your ss until 70 the govt could allow you to roll over up 30k i each year from a 401k into a roth IRA tax free provided you had at least $30k in earned income. Govt gets the benefit of the delayed distribution and gets to collect the ss tax on the earned income which should be more than the income tax they are forgoing especially when you consider many people doing this will earn more than $30k and some wont complete the entire roll over . The taxpayer gets to reduce their 403b balance and thus RMD. Plus it encourages people to stay employed longer which is arguably healthier.

[kathyc2]

Just a thought but in return for delaying your ss until 70 the govt could allow you to roll over up 30k i each year from a 401k into a roth IRA tax free provided you had at least $30k in earned income.

When people put money into a deferred retirement account they are making an implicit contract to pay tax on the withdrawals. How about we do something really radical and have them hold up their end of the contract?

[RWG1950]

The article's proposal allows for individual & annual opt-in or out, but an opt-out would forgo any COLA for that year (no small thing recently)
Seems to me such an opt-out for one year could make sense in certain circumstances. Say a couple MFJ that has T.I. at near the upper 12% marginal limit
but now must begin taking an RMD (of $75-K or so) and also have a large capital asset with a low cost basis that they'd prefer to sell but are just
sitting on it because the $125,000 or so in LTCG income would propel some of their other ordinary income sources to 22% marginal (plus 6% in their state)
and subject them to a substantial increase in Medicare "B" & "D" IRMMA premiums. Haven't done any hard math on this, but If they do not need the income
from the $75-K RMD and $35-K of Social Security, couldn't such an opt-out make some tax sense for them for the one year?

[Dude]

[QUOTE=kathyc2;n31007

How about we do something really radical and have them hold up their end of the contract?

[/QUOTE]

Like we have the govt uphold their contract with social security? The OP suggests either paying the govt your social security check or paying them taxes. This is why the idea has merit. Heads they win tales you lose. Any solution to this problem is going to have to end with the govt winning. The best we can do is give people the opportunity to claim a consolation prize.

[kathyc2]

Haven't done any hard math on this, but If they do not need the income
from the $75-K RMD and $35-K of Social Security, couldn't such an opt-out make some tax sense for them for the one year?

How so? Even at a 32% rate, the tax on 75K would be 24K. You want to pass up 35K in SS to save 24K in tax??

[kathyc2]

Like we have the govt uphold their contract with social security?

Who hasn't received SS?

[kathyc2]

It appears that less than 25K people have Traditional IRA's over 5M. https://www.documentcloud.org/docume...1-jct-mega-ira

If all of the 25K forego SS benefits, there would be 1B less paid out, or 700M after the income tax paid on benefits is put back to trust fund.

RMD's on the 220B would be around 10B. Tax on RMD's of around 3.7B.

Deferred tax revenue of 3.7B compared to .7B trust fund savings. Looks to be the "winner" would be the uber wealthy..

Like I said, the "plan" is dumb.

If anyone wants to show math for how it would benefit someone with IRA balance closer to the average of 500K, have at it.

I get really tired of people complaining about RMD's. No one forced you to choose to defer. May be time to recognize that the mantra of defer, defer, defer is not always beneficial.

[Rapid Robert]

Thank you all for the discussion so far.

For myself, I strongly agree with kathyc2 about RMDs and the need for taxpayers to honor the deferral they agreed to. It doesn't help that in what should be an embarrassing application of anti-logic, the age for triggering RMDs is going up by years when in fact life expectancy in the U.S. has dropped significantly in the last 5-10 years. Of course, the people with enough money in their retirement accounts to not need the money to fund their retirement are not the same ones who have been negatively affected by poor health care availability, COVID-related deaths, and so on.

In fact, those with a lot of pre-tax retirement money would be well advised to start taking some of that out sooner, rather than later, so as to spread the tax burden, and stay within lower brackets, and possibly even reduce the amount of Soc. Sec. that is taxable. The money can always be converted to Roth IRA if not needed right away, or pre-distributed to heirs.

If indeed this plan would represent a net revenue increase for the government, then I'm all for it. Let the people making irrational decisions have their way. It's similar to QCDs, where it seems in many cases that the choice is driven more by fear or resentment of paying any tax, rather than a habit of lifelong large charitable donations. QCDs are promoted as a great way to save on taxes, but in the end the taxpayer still has less money than if they had just paid the tax and kept the rest.

Lastly while I can't speak for Dude, I think the idea of the government not holding up the Soc. Sec. "contract" might be based on a few things:

1) making benefits partly taxable when originally they were promised never to be taxed

2) over achievers who have government pensions and are affected by WEP or GPO (hope I got those acronyms right).

The solution for (1) is simply to index the thresholds for inflation. I don't think we need a solution for (2), since as an insurance plan, Soc. Sec. should not need to pay claims that are already covered by another plan. It's like the firefighters and police who retire before age 50 with a full pension and then go back to work for the government again at an over-blown salary and a second pension. Why should taxpayers fund such unintended largesse?

Lastly, there is the flip side - what about all the people who receive Soc. Sec. benefits who never paid a penny, or paid far less than 35 years? Such as minors, or spouses/ex-spouses. What other type of insurance provides coverage to people who never paid premiums?

[TaxGuyBill]

Maybe I'm wrong, but I don't think the Social Security system was originally meant to be a retirement fund. It was for the "security" of people so they didn't need to worry about living in poverty when they got older.

In other words, it seems weird to me that the system is set up so that everybody gets to collect it - even those who have high income or a large amount of assets.

[Dude]

Any scenario that requires the wealthy to forgo a social security payment must also factor in the amount these individuals have already paid into the system so as to determine the true benefit the government subsequently receives.

[kathyc2]

I didn’t see that anyone said high wealth people must forego SS. My post was referring to the Kiplinger article that said people could forego SS in exchange for not having to take RMD. I was attempting to point out it would probably only help the very high wealth people.

I find it disgusting that someone like Theil can supposedly legally manipulate the system to amass billions in a Roth. I think Congress should enact that the total of deferred accounts combined with Roth cannot exceed a certain dollar amount, say 15-25M. Those that already have more than that or go over by inheriting spouse accounts would have 10 years to bring it under the amount.

The change that Roth to adult children now need to delete the inherited account in 10 years rather than over their life expectancy is harmful for middle class trying to build some generational wealth. I’m not saying an unlimited amount, but something on the line of 500K would make a big difference.

I never did think the one size fits all age for SS benefits makes sense. Someone that works in admin positions in theory can work longer than those in physically demanding jobs that takes a toll on their joints. Instead of saying that at FMA people can draw full benefits and have as much earned income as they want, it could be on a sliding scale. Say at FRA someone can only earn 50-75K to not have benefits reduced, and then have it increase 10% or so a year. As a concession, they could then refund the current year SS tax on the first 50K at FMA.

As far as the taxability of SS, the 25/32K floor that was set in 1983 would be more that triple that amount if indexed for inflation. Currently, a middle-income person with 30K SS, 25K income at regular rates and 20K at LTCG rates would pay 3,956 in FIT. If the floor would change to 50K that amount would go down to 930.
I don’t have a problem with minor children with a deceased parent drawing SS. When SS was established, it was unusual for a married woman with children to work for wages. Since women still earn less than men on average, I don’t really have a problem with that also. Remember, there are people that pay in to SS and no one ever benefits from their contributions.

In summary, we can some up with all the ideas that we want, but unless those making laws suddenly care more about the people than their monied donors nothing will change.

[Rapid Robert]

"I don’t have a problem with minor children with a deceased parent drawing SS.

In reference to my comment on this, I was talking about minors who get SS benefits with both parents still alive. I have an 18 yr old nephew in this situation who has been receiving benefits for about 10 years now, I think. Probably not common, but still an example of perhaps over generous benefits.

Remember, there are people that pay in to SS and no one ever benefits from their contributions."

Yes, that is a characteristic of all insurance. Remember the "I" in OASDI stands for "insurance". The disasters being insured against with "premiums" paid (tax) are disability, being an orphan or widow, and getting old.

It was for the "security" of people so they didn't need to worry about living in poverty when they got older.

Some advocate for UBI (universal basic income) to help everyone (including young children) avoid living in poverty.

In other words, it seems weird to me that the system is set up so that everybody gets to collect it - even those who have high income or a large amount of assets.

Well, insurance payouts are usually not based on need. However, there is some means testing on the front end, in the form of "bend points" so that the more earnings you have subject to FICA tax, the less they count for calculating your future benefits. I only learned about bend points late in the game, but they were in factor in deciding that continuing to work to earn any significant amount of self-employment income was a losing cause as far as FICA was concerned (i.e. continuing to pay 12.4% OASDI with essentially no increase in benefits even if I replaced the lowest-earning year in my top 35 years.

And of course, many have speculated that someday the balance in the Roth account may be used to determine further reductions in SS benefits, or increased taxability.