Author Topic: Case Study - Newb: How to Leverage Tax Opportunities During Planned Unemployment  (Read 2298 times)

notpennysboat

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Life Situation:
Married filing jointly, I'm 31 and my partner is 32. Unique situation - we quit our jobs in Aug/Sept 2016 to travel for ~1 year. No current residence in US.

Gross Salary/Wages:
Currently $0 in income. Thus no pre-tax deductions. (Before quitting, we were making ~$8,200/month in income - ~$7,000 of that from my partner. He very much does not want to return to that work, but it's always an option).

Current monthly expenses:
<$3100/month. Planning to get closer to $2,100/month in the next few months by slowing down travel.
+$48/month for storage unit that we should get rid of whenever we return to the States.

Obtained an ACA exemption for 2016. We anticipate doing the same for 2017, though haven't reviewed other options.

Assets:
Partner's 401k - $55,000 (still w former employer)
My Trad IRA - $10,000 (Betterment)
Partner Pension - $23,000
My Pension - $4,000
Roth IRA - $2,100
(Investments are lower than I'd like - considering former income - as we paid for my 4-year graduate degree in cash - during which time I wasn't working)

EF: $15,000 Checking/Savings
Remaining travel fund: ~$19,000 Checking/Savings
No debt.

Specific Question(s):
New to the forums, so thanks in advance for your help and patience! I've been reading the Taxes section, as well as MadFIentist and Investopedia, but haven't quite found the answer I'm looking for. Partner and I quit our jobs in August and Sept 2016 and now we're vagabonding. We don't have any income yet in 2017, and while we will eventually need to side hustle/get jobs again, it's unlikely that we'll have much, if any, income in 2017.

Is there a way for us to leverage the unemployment when/if moving investments? If we rollover partner's 401k to Trad IRA, could we then rollover <$18,000 to a Roth IRA and avoid paying taxes on it since it would be our only income this year? I feel like there's an obvious piece of this puzzle I'm missing.

At a minimum, I'd like to move the $55k 401k to a Trad IRA that I can invest in low-cost index funds. We already have an (empty) brokerage account with Schwab. Would Schwab have a decent selection of broad market low-cost index funds (I know they try to compete w Vanguard) or should I just open a Vanguard acct? Also, what can we do with our pensions? We irresponsibly know very little about them, and it's been difficult to request the information from our former employers, but we're working on it.

Thank you!



« Last Edit: April 15, 2017, 01:20:53 PM by notpennysboat »

kpd905

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If you roll your 401k to a traditional IRA, you can convert any traditional assets to Roth accounts, which is considered a taxable event.

However, since you have no other income, a good chunk of it will be tax free.  For 2017, you will have standard deduction ($12,700) and two personal exemptions ($8100), so you can convert $20,800 and pay no tax.  You could also think about convert through the 10% bracket, which would be another $18,650.

Side note: what are you doing for health insurance while you travel?  The amount you convert might impact any ACA subsidies, so you'd want to run the math on that as well.
« Last Edit: April 15, 2017, 10:17:34 AM by kpd905 »

notpennysboat

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Thanks for your help, @kpd905. I added the ACA info to original post - we got an exemption in 2016, but haven't looked at obtaining insurance in 2017 versus an exemption (since income would be so low). Will begin learning the options, thanks!

kpd905

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It looks like the 400% poverty level for 2 people is $64,100, so as long as you keep your income under that number you will get a subsidy.

Hotstreak

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You'll have to look at your pension plan documents or call HR at your old company and ask questions.  I can tell you about my pension and maybe it will give context.  In your situation I could either 1) roll my pension over in to an IRA, this is a non-taxable event in my case 2) cash out the pension and pay taxes & fees 3) either now or in the future, "retire" and take an annuity payout based on the balance, my age, etc. 

Given those options I think it would be best for you to roll it over to a regular IRA, since it is likely earning very little in it's current form.

notpennysboat

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@hotstreak Thanks, I'm assuming just roll it to a traditional IRA? We've called a few times, but haven't quite gotten the info we need, still chasing it down from behemoth HR depts. Thank you!

marty998

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Looks like you don't have a lot of taxable investments, but it would have been a good opportunity to reset the cost base of your investments by selling, realising gains, and repurchasing.