Make Estimated Quarterly Tax Payments on Roth Conversions. Or Penalties Will Bite.
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Have a question about saving for retirement or your personal financial situation? Whatever the question, Barron’s Retirement can try to help. Email retirement@barrons.com, and we might look to financial pros 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’ll be reporting no earned income and only a modest amount from dividend and interest income for this year. Do I need to pay the income taxes on the Roth conversion to the IRS by the April deadline in 2023 or sooner in estimated quarterly taxes in 2022?
You should 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 compounds 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’ll face a penalty of 0.5% of the tax owed for each month or partial month that the tax goes unpaid, up to 25%.
“This clearly hurts the tax-savings component that their conversion could provide them,” Kronenberg says. “They probably made this conversion because they expect less income this year, as opposed to last year, so paying a penalty would lessen the benefit of this conversion from that standpoint.”
Q: I’m 63 and on Social Security disability benefits. Can I go on regular Social Security now, or do I have to wait until a certain age?
You could switch from disability benefits to retirement benefits now, but you’d almost certainly be better off waiting until you reach full retirement age and that transition occurs 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 your full retirement age, which is close to 67, based on the year of your birth, he says.
The monthly check you’re getting now likely is within a few bucks of what you can expect after reaching full retirement age, so don’t switch to retirement benefits early and take a reduced amount, says Dan Simon, retirement planning advisor at Daniel A. White & Associates.
“When someone’s receiving disability benefits, it’s essentially their Social Security retirement amount at full retirement age, but they’re just receiving it early,” he says. “In most cases, it’s beneficial to just remain on Social Security disability, and then it’s automatically going to transfer over at full retirement age.”
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