Taxes, Social Security benefits and other reader questions
Q: I invested in I bonds several years ago, but I haven’t been paying taxes on interest yearly. Can I start paying taxes each year for my I bonds to avoid a large tax hit when I redeem them? A:
You can switch to paying taxes on interest yearly, but you will have to pay taxes for all of the years you held the I bonds without paying taxes on the interest. See IRS Publication 550, Method 2.
Q: I will turn 70 in 2024. My wife turned 70 in 2022 and initiated receiving Social Security benefits at that time. Can I claim a spousal benefit now, and then when I reach 70, initiate my own benefit and receive the 8% increase in my benefit amount for each year after reaching my full retirement age? A:
No, you cannot. Only individuals who were born prior to Jan. 2, 1954 are eligible for the option you describe. You were born after that date, so if you were to apply for spousal benefits, you would also be for your own Social Security benefit, and you would receive the higher amount as your benefit. So, if you apply for a spousal benefit now, you will not maximize the increases to your benefit amount as you would if you waited until age 70 to apply.
Q: I recently turned 70 and applied for my Social Security benefits. My wife, who had reached her full retirement age, filed for spousal benefits. I was under the impression that my wife would receive 100% of my age 70 benefits. A Social Security representative informed us that my wife would only be eligible for 50% of my Social Security benefit based on my benefit at my full retirement age. Is that right? A:
The Social Security representative was correct. There is a distinction between benefits available as a spousal benefit and survivor benefits. If you predecease your spouse, she would then be eligible to receive 100% of your age 70 benefits, as long as she had reached her full retirement age and the survivor benefit exceeded the Social Security benefit she was entitled to based on her own work record. She would be entitled to whichever amount is higher, not both.
Q: I had a 401(k) that I recently rolled over to an IRA account. I had instructed my adviser to do the rollover, but I did not specify that I wanted a Roth IRA. He did not ask me my preference, and he did a Roth rollover without my permission. I was informed by the IRS that I had a tax obligation of over $50,000 as a result of the rollover in 2022. They also told me that I could not reverse the rollover and put the funds into a traditional IRA, rather than the Roth IRA. Do I have any options other than taking legal action against the adviser who did the Roth rollover without informing me? A:
Unfortunately, under current regulations, once you do a Roth rollover, you cannot reverse it. The IRS has now disallowed any option to reverse a rollover to a Roth. I don’t know if you will be successful in taking action against your adviser, but IRA expert Ed Slott’s group confirmed that you no longer have the option to reverse the Roth rollover.
Q: I am confused about the regulations related to the taxability of Social Security benefits. Both my husband and I have been receiving Social Security benefits for many years, and we both still work under Social Security. Will the additional work we do increase our benefits, and what is the impact on Social Security income taxes we pay on our benefits? A:
The work you do after you have initiated Social Security benefits can increase your Social Security benefits.
Your benefits are based on the highest income of 35 years of work you have done under Social Security (adjusted for inflation). When the work you do replaces one of the 35 years that was used to compute your benefits when you applied for Social Security benefits, your Social Security benefit would be recomputed, and you would receive a higher benefit.
When you do receive a higher benefit, then based on your other income, the federal taxes you owe on your Social Security benefits may increase.