I took some of the ideas from my Roth Conversion thread into account with a few other ideas. Starting a new thread since this isn’t Roth Conversion specific and I want other people to be able to discuss Roth Conversion strategies in the other thread. Also, this will be a discussion based around optimizing for another variable social security (SS) credits.
It appears I will have 5 reasonable options for my 2017 taxes. I don’t have much self employed income this year since I took time off to create some IP to leverage in future years. It’s relatively easy to legally decide whether to take up to a few thousand dollars in business expenses by Dec 31 or not so once I pick my desired path, I can make sure the end of year numbers line up, legally.
Please do not assume I can shift expenses into 2018 when I may be in a higher marginal tax rate. In most of my specific cases, I am simply choosing to forgo taking a tax deduction in some of these options. It may be beneficial to declare more income than I need to, in order to qualify for certain things. I am not a lawyer, but there’s many things a self-employed person deducts such as a laptop that could be a business expenses, or personal, and I don’t think the IRS will find me guilty of overpaying my taxes by failing to deduct a laptop I bought in 2017. Not even sure what the penalty for overpayment would be.
The image below is just the key numbers from my spreadsheet that matter in the analysis.
OPTION 1 - I declare no SE income. I can convert ~$14k of 401k money into Roth IRA, tax-free. I earn zero SS credits and contribute nothing into a Roth IRA (since I have no income and am not allowed to contribute).
OPTION 2 - I declare no SE income. I decide to covert more money into the IRA and pay some taxes, up to the 10% tier. I can convert ~$22k and pay ~$800 in taxes. Thus, I am paying $800 to convert an extra $8k versus option 1.
OPTION 3 - I declare $2k SE income. This allows me to contribute $2k into a Roth IRA for the year and earns me a single SS credit. I can convert ~$20k and pay ~$300 in taxes. This is because I now able to use the Savers Credit. Comparing this to Option 2, it’s costing me $500 more to perform Option 2 and convert $2k more in taxes, or 25%. So relative to this Option, Option 2 is crap, because the last $2k is at the 25% tax bracket.
OPTION 4 - I declare $2.6k of SE income. This allows a $2.6k Roth IRA contribution and earns 2 SS credits. Each SS credit in 2017 requires $1300 of earned income, and it might be worthwhile to declare an extra $600 in income to get one more credit. However, this comes at a cost of an extra $100 in taxes because 15.3% SE tax. So the question becomes - if I compare Option 3 and 4, is $100 worth buying 1 SS credit. I currently have 53 credits, which is more than the 40 needed for Disability coverage, but 20 of these credits have to be within the last 10 years.
I plan to early retire and I like the idea of SSDI (I am a libertarian, but I have been paying for it and wasn’t able to opt out, so yes, I plan to use if it I become legitimately disabled). Once I stop working, my SSDI coverage effectively can only extend a maximum of 5 years because SS Credits are capped at 4 per year. So in the best case scenario, once I stop working, I’ll have 20 credits in the most recent 5 years, which then extends Social Security Disability Insurance (SSDI) coverage another 5 years.
So effectively, each credit of SS is worth ~1/4 year SSDI coverage. Or 4 credits is a full year’s worth. Framing Option 4 in this way, is $400 worth one year premium of SSDI coverage. That seems pretty expensive, but only since I don’t plan on becoming disabled. If I do become disabled, I would currently qualify for $2k per month, for the rest of my life.
I have even considered continuing to do very part time work in retirement, just to qualify for the 4 SS credits each year, to keep my SSDI benefits in place. Perhaps every other year. Or perhaps I simply earn 2 per year, because the marginal cost of the second credit is much lower than the marginal cost of the 3rd and 4th, given the Savers Credit. I need a minimum of $2k of income to qualify for $1k savers credit annually, so I only need an extra $600 more for the second SS credit, versus $1300 more for each of the 3rd and 4th credits. SS credits will keep going up each year in cost, so the sooner I earn them the better, which brings us to the next option:
OPTION 5 - Declare $5,200 in income - earn the full 4 SS credits. Extend my SSDI coverage by a full year. Put $5200 into a Roth IRA. Convert $16.7k into the Roth. Pay $800 in taxes.
One final consideration - my SSDI benefits of $24k per year appear to be calculated based on my salaries of recent years. If I wind up shifting into early retirement and just declaring a few thousand dollars in income each year to keep my SSDI coverage active, it’s possible the annual benefit payout will be significantly reduced. I imagine there must be some bare minimum payout they give, but I have been unable to find exact numbers. I did reverse engineer the exact estimated SSDI payout I am currently eligible for, per my most recent SS statement online, and annual salaries do appear to be included in the calculation