Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Better Off Divorced?
Old 02-05-2012, 05:42 PM   #1
Recycles dryer sheets
 
Join Date: Jan 2012
Posts: 65
Better Off Divorced?

I am doing my 2011 taxes now. I hate this annual exercise. My wife and I make approximaely the same income---$120K each per year. We are both salaried. Our house is paid off; we max out our 401k contributions, and max out our HSA. Our combined MAGI is too high for us to contribute to Roth IRAs. I also understand that because our incomes are nearly identical that we likely pay more Federal income tax than we would if we were not married and filed individually.

I looked at the IRS regs--it appears that if were single (and filed as such), we would both be elligble to contribute to Roth IRAs as each of our MAGI would be less than the $122K max, and our total combined tax liability would be lower.

Am I missing something obvious, or financially speaking are we be better off divorced and "shacking up" than staying married? Wife saw me typing this---her answer is "no" regardless of the finanical ramifications. I am glad I married a romantic, but I still would like to know the answer.
__________________

__________________
ProGolferWannabe is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-05-2012, 05:48 PM   #2
Thinks s/he gets paid by the post
 
Join Date: Jul 2003
Location: Pasadena CA
Posts: 2,695
Oh, Oh, oh, what a great idea, let me run it past the wife


Some times you just gotta forget the numbers.
__________________

__________________
T.S. Eliot:
Old men ought to be explorers
yakers is online now   Reply With Quote
Old 02-05-2012, 06:30 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
bbbamI's Avatar
 
Join Date: Dec 2006
Location: Dallas 'burb
Posts: 9,039
__________________
There's no need to complicate, our time is short..
bbbamI is offline   Reply With Quote
Old 02-05-2012, 06:48 PM   #4
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Quote:
Originally Posted by ProGolferWannabe View Post
Am I missing something obvious, or financially speaking are we be better off divorced and "shacking up" than staying married?
Well, the first obvious thing you're missing (that your spouse is telling you) is that the "divorce penalty" is much more punitive (and more hazardous to your longevity) than the marriage tax...

The second obvious thing you're missing is that you can still contribute to a conventional (non-deductible) IRA. (My spouse and I had to do this all the time during our dual-working-couple years.) What you can now also do these days is contribute to two non-deductible IRAs and immediately convert them to Roths. It's called a "backdoor Roth IRA":
The Serial Backdoor Roth, A Tax-Free Retirement Kitty - Forbes
Quote:
Income restrictions on conversions were lifted starting Jan. 1, 2010, so anyone—regardless of income—can convert a traditional IRA to a Roth.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 02-05-2012, 08:28 PM   #5
Recycles dryer sheets
 
Join Date: Feb 2009
Posts: 61
There was a Love Boat episode that covered this very subject. I suggest you find it, rent it and take notes.

GM
__________________
Time, to eat all your words,
swallow your pride, open your eyes - Roland Orzabal, Curt Smith
Golden Mean is offline   Reply With Quote
Old 02-05-2012, 08:59 PM   #6
Recycles dryer sheets
 
Join Date: Jan 2012
Posts: 65
Quote:
Originally Posted by Nords View Post
Well, the first obvious thing you're missing (that your spouse is telling you) is that the "divorce penalty" is much more punitive (and more hazardous to your longevity) than the marriage tax...

The second obvious thing you're missing is that you can still contribute to a conventional (non-deductible) IRA. (My spouse and I had to do this all the time during our dual-working-couple years.) What you can now also do these days is contribute to two non-deductible IRAs and immediately convert them to Roths. It's called a "backdoor Roth IRA":
The Serial Backdoor Roth, A Tax-Free Retirement Kitty - Forbes
Very true on the first point. Very funny too.

Second point--yes, I did understand this was an option, but I have previously made pre-tax IRA contributions. I understand that if I do this so-called "backdoor", I will need to pay tax on the pro-rated portion of the pre-tax contributions that are converted to the Roth; I am not allowed to convert just the post tax contributions. I was trying to avoid this.

Thanks for the laugh though.
__________________
ProGolferWannabe is offline   Reply With Quote
Old 02-05-2012, 09:01 PM   #7
Recycles dryer sheets
 
Join Date: Jan 2012
Posts: 65
Quote:
Originally Posted by Golden Mean View Post
There was a Love Boat episode that covered this very subject. I suggest you find it, rent it and take notes.

GM
No reason for me to watch Comedy Central anymore--I can get my laughs along with sound financial advice all here in one place.
__________________
ProGolferWannabe is offline   Reply With Quote
Old 02-05-2012, 09:23 PM   #8
Thinks s/he gets paid by the post
Helen's Avatar
 
Join Date: Oct 2004
Location: Portland
Posts: 1,345
Without the marriage certificate, one of you may be subjected to the estate and/or inheritance tax should one of you pass before the other.
__________________
Helen is offline   Reply With Quote
Old 02-05-2012, 09:31 PM   #9
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Quote:
Originally Posted by ProGolferWannabe View Post
Second point--yes, I did understand this was an option, but I have previously made pre-tax IRA contributions. I understand that if I do this so-called "backdoor", I will need to pay tax on the pro-rated portion of the pre-tax contributions that are converted to the Roth; I am not allowed to convert just the post tax contributions. I was trying to avoid this.
Well, now you're in the classic "should I convert my conventional IRA to a Roth" flowchart. You're probably in a punitively high tax bracket already, but you may want to revisit this decision when you ER and before you have to start taking RMDs. During that period you might be in a lower tax bracket (for converting a little each year) than the tax bracket you'd be in when RMDs start.

We know that when spouse's pension starts that we'll be in the 25% income tax tax bracket. We've been converting a little IRA every year for almost a decade, up to the top of the 15% income tax bracket. If you think you're going to do that too, then it'd still be worth making those conventional IRA contributions instead of making no IRA contributions at all.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 02-05-2012, 10:11 PM   #10
Recycles dryer sheets
 
Join Date: Jan 2012
Posts: 65
Quote:
Originally Posted by Nords View Post
Well, now you're in the classic "should I convert my conventional IRA to a Roth" flowchart. You're probably in a punitively high tax bracket already, but you may want to revisit this decision when you ER and before you have to start taking RMDs. During that period you might be in a lower tax bracket (for converting a little each year) than the tax bracket you'd be in when RMDs start.

We know that when spouse's pension starts that we'll be in the 25% income tax tax bracket. We've been converting a little IRA every year for almost a decade, up to the top of the 15% income tax bracket. If you think you're going to do that too, then it'd still be worth making those conventional IRA contributions instead of making no IRA contributions at all.
This makes sense--thank you for the suggestion. I have been bascially been saving/investing the equivalent amount I would invest in a Roth IRA in an after tax account (blended Vanguard fund), so I could easily shift my investments from "after-tax" to "after-tax IRA".
__________________
ProGolferWannabe is offline   Reply With Quote
Old 02-06-2012, 08:08 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,424
Quote:
Originally Posted by ProGolferWannabe View Post
I am doing my 2011 taxes now. I hate this annual exercise. My wife and I make approximaely the same income---$120K each per year. We are both salaried. Our house is paid off; we max out our 401k contributions, and max out our HSA. Our combined MAGI is too high for us to contribute to Roth IRAs. I also understand that because our incomes are nearly identical that we likely pay more Federal income tax than we would if we were not married and filed individually.

I looked at the IRS regs--it appears that if were single (and filed as such), we would both be elligble to contribute to Roth IRAs as each of our MAGI would be less than the $122K max, and our total combined tax liability would be lower.

Am I missing something obvious, or financially speaking are we be better off divorced and "shacking up" than staying married? Wife saw me typing this---her answer is "no" regardless of the finanical ramifications. I am glad I married a romantic, but I still would like to know the answer.
You don't need to divorce. If Roth is your focus the married-filing-separately limits for Roths are the same as a single, but I suspect that your overall tax bill might be higher. Might be worth looking into though.
__________________
pb4uski is online now   Reply With Quote
Old 02-06-2012, 08:15 AM   #12
Recycles dryer sheets
 
Join Date: Jan 2012
Posts: 65
Quote:
Originally Posted by pb4uski View Post
You don't need to divorce. If Roth is your focus the married-filing-separately limits for Roths are the same as a single, but I suspect that your overall tax bill might be higher. Might be worth looking into though.
Could you point me to that reference? What I saw was they were the same only if we did not live together for any part of the tax year.
__________________
ProGolferWannabe is offline   Reply With Quote
Old 02-06-2012, 08:22 AM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,424
Got this off the internet, I assume that it is right but have not checked it back to tax forms, instructions or anything like that. But note that the Single and MFS limits are the same.


Historical Roth IRA Income Limits

Every year, the income limits are evaluated against inflation and incomes to determine if a change is needed. In the past five years there has only been one instance where the limit did not change for the two major categories.

YearMarried Filing Jointly or Qualifying WidowerMarried Filing Separately (lived with spouse)Single, Head of Household, or Married Filing Separately
2012$173,000 - $183,000$0 - $10,000$110,000 - $125,000
2011$169,000 - $179,000$0 - $10,000$107,000 - $122,000
2010$167,000 - $177,000$0 - $10,000$105,000 - $120,000
2009$166,000 - $176,000$0 - $10,000$105,000 - $120,000
2008$159,000 - $169,000$0 - $10,000$101,000 - $116,000
2007$156,000 - $166,000$0 - $10,000$99,000 - $114,000
2006$150,000 - $160,000$0 - $10,000$95,000 - $110,000
__________________
pb4uski is online now   Reply With Quote
Old 02-06-2012, 09:10 AM   #14
Recycles dryer sheets
 
Join Date: Jan 2012
Posts: 65
Quote:
Originally Posted by pb4uski View Post
Got this off the internet, I assume that it is right but have not checked it back to tax forms, instructions or anything like that. But note that the Single and MFS limits are the same.


Historical Roth IRA Income Limits

Every year, the income limits are evaluated against inflation and incomes to determine if a change is needed. In the past five years there has only been one instance where the limit did not change for the two major categories.

Year Married Filing Jointly or Qualifying Widower Married Filing Separately (lived with spouse) Single, Head of Household, or Married Filing Separately
2012 $173,000 - $183,000 $0 - $10,000 $110,000 - $125,000
2011 $169,000 - $179,000 $0 - $10,000 $107,000 - $122,000
2010 $167,000 - $177,000 $0 - $10,000 $105,000 - $120,000
2009 $166,000 - $176,000 $0 - $10,000 $105,000 - $120,000
2008 $159,000 - $169,000 $0 - $10,000 $101,000 - $116,000
2007 $156,000 - $166,000 $0 - $10,000 $99,000 - $114,000
2006 $150,000 - $160,000 $0 - $10,000 $95,000 - $110,000

Thank you. From IRS Publication 590, I read the following: "If you have taxable compensation and your filing status is married filing separately and you lived with your spouse at any time during the year and your modified AGI is $10,000 or more, you cannot contibute to a Roth IRA"
__________________
ProGolferWannabe is offline   Reply With Quote
Old 02-06-2012, 12:17 PM   #15
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
We were in about the same situation when I was working. There was a significant marriage penalty in the federal taxes. The Bush cuts helped a bit, so look out if they are allowed to expire! I'm retired now, so we're down to one salary and should be benefitting from that marriage bonus when the incomes are very different. Maybe you should do the same!
__________________
Animorph is offline   Reply With Quote
Old 02-06-2012, 01:37 PM   #16
Thinks s/he gets paid by the post
ls99's Avatar
 
Join Date: May 2008
Posts: 4,792
Quote:
Originally Posted by ProGolferWannabe View Post

Am I missing something obvious, or financially speaking are we be better off divorced and "shacking up" than staying married? Wife saw me typing this---her answer is "no" regardless of the finanical ramifications. I am glad I married a romantic, but I still would like to know the answer.

About 25 years ago neighbors across the street in a NY suburb did divorce, specifically to lower taxes. Did it very quietly most in the neighborhood did not know, continued life as before, their kids found out after the father died.

Worked well for them for more than 20 years after divorce.
__________________
There must be moderation in everything, including moderation.
ls99 is offline   Reply With Quote
Old 02-06-2012, 01:50 PM   #17
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,093
Don't know if this will apply in your case but I was never eligible to contribute to a Roth IRA or take deductions on a traditional IRA. What I did was contribute the max into my 401k and also made trad IRA after tax contributions.

When I ER'ed I converted the entire tIRA to a ROTH and only paid tax on the gains. The following year I rolled over the large 401k to an IRA.

If I hadn't waited on the 401k rollover I wouldn't have been able to do the Roth conversion on the much smaller tIRA.
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is offline   Reply With Quote
Old 02-06-2012, 03:42 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,424
Quote:
Originally Posted by ProGolferWannabe View Post
Thank you. From IRS Publication 590, I read the following: "If you have taxable compensation and your filing status is married filing separately and you lived with your spouse at any time during the year and your modified AGI is $10,000 or more, you cannot contibute to a Roth IRA"
Yup, sounds like they closed the door on that idea unless you live apart. So if one of you moave back in with you folks and you see each other a lot but don't live together then it might work

Hardly worth the hassle. Conversion is easier.
__________________
pb4uski is online now   Reply With Quote
Old 02-06-2012, 07:56 PM   #19
Recycles dryer sheets
glippy's Avatar
 
Join Date: Mar 2010
Location: New England
Posts: 197
I hear you used to be able to divorce on December 31st, then Remarry January 1st, so that you could file as an individual.

Presumably that's why the IRS created the regulation governing "Divorces for tax purposes with intention to remarry."
__________________

__________________
glippy is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Getting divorced: he partly blames RE dreams Marathoner Other topics 452 12-18-2016 07:36 PM

 

 
All times are GMT -6. The time now is 10:56 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.