First full year of me retired and DW working. Taxes?

[Tree-dweller]

2012 tax year is the first year where I have been retired all year, but my DW is still working at a job she (claims she) still enjoys. I know I have some number-running to do, but if anyone has any tax surprises or gotchas they experienced when in that same position and would like to share them, this rookie would appreciate it. Thanks!

 

[Alan]

Can't think of any gotcha's but even though you are not working, you are entitled to contribute to an IRA (Roth or Traditional) as long as your spouse is working.

 

[easysurfer]

The gotcha that I experienced my during my first year of retired taxes was by moving my 401K, pension lump sum to my IRA, come tax time, I forget that I'd get a 1099-R form. Since I rolled the lump sums over to the IRA, there wasn't income, yet I still needed a 1099-R and by filing too soon, I ended up having to do amended returns to include the 1099-R.

Moral of the story, don't file too early.

 

[Alan]

Talking of 401k's, if you still have after tax tIRA's and are considering converting some to a ROTH to take advantage of lower tax rates, then don't roll over your 401k until next year.

 

[rescueme]

For me, it was purchasing a car (for cash, using TIRA funds) without thinking about "crossing boundaries" into the next tax bracked.

If was one of those "WTF" moments that hit me when doing my taxes at year-end.

Next time, I'll go for the payments (assuming an intrest free deal) or still pay cash but with a mix of taxable/non-taxable funds to keep me from having to pay more taxes than required, just due to timeing.

 

[Tree-dweller]

Thanks all. It sounds like, with the exception of Alan's reminder on IRAs, that there were few surprises at tax time dealing with a still-working wife. I'm looking closely at the change from filing jointly to separately.

 

[lemming]

Do you think you have to file separately? Because you don't.
If you have a lot of expenses, medical or other maybe it would be helpful, but likely not.
I'm very sad to hear the medical floor is going up next year to 10%
When my insurance premiums are deductible it has really cut down on my taxable base.

 

[Animorph]

We fell below income limits/phase-outs for tuition tax credits and Roth contributions. I was able to make Roth contributions on DW's income, without income of my own. I doubt there will be any benefit to filing separately. Check out "backdoor Roth contributions" if your income level is still too high for a Roth contribution. Any IRA's/401k rollover IRA's with pre-tax money in them kind of block that path. That was a problem for us a couple of years when DW's income jumped too high to make normal contributions.

 

[BOBOT]

Talking of 401k's, if you still have after tax tIRA's and are considering converting some to a ROTH to take advantage of lower tax rates, then don't roll over your 401k until next year.

Alan, could you explain this point?
Our CFA recommended that DW convert this year so that she can roll over her 403b to her tIRA next year when she retires. I guess I didn't get her rationale.

 

[Alan]

Alan, could you explain this point?
Our CFA recommended that DW convert this year so that she can roll over her 403b to her tIRA next year when she retires. I guess I didn't get her rationale.

Suppose you have a tIRA with after tax contributions of $50k, and it is now worth $70k. You have no other IRA's, but you have a 401k of $210k.

If you leave your 401k and convert your tIRA then you will pay tax on $20k as this is the gain on your tIRA, and your IRA basis is now zero for future years.

If you convert your 401k in the same year as you do your conversion then you will pay tax on much more of that $70k. Since $70k is now 25% of the total value of the IRAs. you will only get 25% of your $50k basis ($12.5k).

You will pay tax on $57.5k instead of on $20k. Your cost basis going forward will now be $37.5k (I may have that calculation a little wrong, but it is mostly correct)

 

[BUM]

IMO being retired and having a working spouse - doesn't get any better than that

 

[BOBOT]

Suppose you have a tIRA with after tax contributions of $50k, and it is now worth $70k. You have no other IRA's, but you have a 401k of $210k.

If you leave your 401k and convert your tIRA then you will pay tax on $20k as this is the gain on your tIRA, and your IRA basis is now zero for future years.

If you convert your 401k in the same year as you do your conversion then you will pay tax on much more of that $70k. Since $70k is now 25% of the total value of the IRAs. you will only get 25% of your $50k basis ($12.5k).

You will pay tax on $57.5k instead of on $20k. Your cost basis going forward will now be $37.5k (I may have that calculation a little wrong, but it is mostly correct)

Thanks Alan, this makes sense....except....
In our case the tIRA was funded a lot of years ago with pre-tax money, and it's always been my belief that it would be taxed as regular income when withdrawn regardless of basis/gain. Is this not so?

 

[Alan]

Thanks Alan, this makes sense....except....
In our case the tIRA was funded a lot of years ago with pre-tax money, and it's always been my belief that it would be taxed as regular income when withdrawn regardless of basis/gain. Is this not so?

Correct. This is only worth considering if you have an after-tax IRA. If you have a zero cost basis then there is no tax advantage to be gained by what I suggested above.

Talking of 401k's, if you still have after tax tIRA's and are considering converting some to a ROTH to take advantage of lower tax rates, then don't roll over your 401k until next year.

 

[gerntz]

If you have cap gains that you haven't taken, & your taxable joint return income is below ~$71K, then all cap gains taken to bring TI up to $71K are taxed at 0% in 2012.

 

[Animorph]

If you have cap gains that you haven't taken, & your taxable joint return income is below ~$71K, then all cap gains taken to bring TI up to $71K are taxed at 0% in 2012.

I think there is a qualified dividend break as well. I was experimenting with Turbo Tax seeing what we could do with Roth conversions in a partial year for DW's income next year. Dividends were moving from untaxed to taxed if I let income get too high.

 

[jebmke]

Talking of 401k's, if you still have after tax tIRA's and are considering converting some to a ROTH to take advantage of lower tax rates, then don't roll over your 401k until next year.

This also gives you time to check to make sure there are not any state tax issues that might affect your decision. In Maryland, when you reach 65 you may be eligible to exclude some of your qualified retirement income from state income taxes. A 401K distribution is considered a QR plan but an IRA distribution is not. If you roll a 401K to an IRA you potentially lose the benefit of the state exclusion.

This may be unique to Maryland but, as always, look before you leap.