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Intentionally Increasing Income to Increase Social Security Benefits?

A reader writes in, asking:

“I have been unemployed for two years and don’t know that I will work again. I am considering converting part of my IRA to a Roth IRA, in part to increase the number of earning years that go into the calculation of my future SS benefits. If the only ‘earned income’ I have in a year is related to such a conversion, will that increase my years of service included in my SS benefit calculation?”

Over the last month or so, I’ve received a handful of questions like this — people wondering about realizing capital gains or doing a Roth conversion in order to increase their Social Security benefits.

To be as clear as possible: This doesn’t work. Neither capital gains nor income from a Roth conversion is included in the calculation of your “average indexed monthly earnings” upon which your Social Security retirement benefit is based.

Section 713 of the Social Security Handbook (or, alternatively, Section 404.211 of the Code of Federal Regulations) outlines the types of income that are included:

“In computing your AIME, we include the following as total earnings (subject to the yearly limits in §714):

  1. Wages covered by Social Security and paid during the computation period;
  2. Self-employment income covered by Social Security and allocated to this period;
  3. Military service wage credits;
  4. Railroad compensation creditable for Social Security purposes; and
  5. Deemed wages if you were interned in the U.S. during World War II.

We may not count earnings from employment or self-employment not covered by Social Security in computing your AIME.”

In other words, Roth conversions, other distributions from tax-deferred accounts, capital gains, dividends, and interest are all excluded from this calculation. Or said yet another way, there’s nothing you can do with your portfolio that would increase your earnings for the purpose of calculating your Social Security retirement benefit.

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If you want to discuss this article, I recommend starting a conversation over at the Bogleheads investing forum.
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