Make estimated quarterly tax payments on Roth conversions. Or sanctions will bite.
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Do you have a question about retirement savings or your personal financial situation? Whatever the question, Barron’s Retirement can try to help. Email retirement@barrons.com, and we may be looking for financial professionals for answers.
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Q: My wife and I are retired and made a significant Roth conversion from my traditional individual retirement account in January. We report no earned income this year and only a modest amount of dividend and interest income. Do I have to pay the income tax on the Roth conversion to the IRS before the April 2023 deadline or earlier in estimated quarterly taxes in 2022?
You must make estimated quarterly payments to avoid penalties, says Jeff Kronenberg, founder of Ridgefield, Conn.-based advisory Imagine Wealth Group.
When quarterly tax payments are late, interest accrues on the unpaid balance and is compounded daily until the balance is paid in full. The interest rate for taxpayers other than corporations is the federal short-term rate plus 3%, according to the Internal Revenue Service.
In addition, you will be fined 0.5% of the tax due for each month or partial month that the tax remains unpaid, up to 25%.
“This clearly hurts the tax-saving component that their conversion could provide them,” Kronenberg says. “They probably made this conversion because they expect less revenue this year than last year, so paying a penalty would reduce the benefit of this conversion from that point of view.”
Q: I am 63 and on disability benefits. Can I get regular social assistance benefits now or do I have to wait until a certain age?
You could switch from disability benefits to retirement benefits right now, but it’s almost certainly better to wait until you’ve reached full retirement age and that transition will happen automatically, says Chuck Czajka, founder of financial planning firm Macro Money Concepts. You’ll get a reduced monthly check if you claim your retirement benefits before full retirement age, which is nearly 67, based on the year of your birth, he says.
The monthly check you’re getting now is probably within a few dollars of what you can expect after reaching full retirement age, so don’t switch early for retirement benefits and take a lower amount, says Dan Simon, retirement planning consultant at Daniel A Wit & Associates.
“If someone receives disability benefits, that’s essentially the Social Security pension amount at full retirement age, but they’re just receiving it early,” he says. “In most cases, it’s beneficial to just stay on Social Security, and then it automatically goes over to full retirement age.”
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