Marriage, Student Loans, Taxes
So, after 10 years the push for marriage has finally arrived. The old girl certainly deserves it, so later this year I will become a married man. The planner in me started looking at tax ramifications and I am not pleased by what I have found out. Here is the scenario; We are both 30 and I have been away on military orders since last June and will be until April 2015.
Issue #1
She is a school social worker and because of this she is eligible for a “public service student loan forgiveness” program through the government. This comes out to her paying approximately $20,000 over 10 years and the remaining $60,000 is forgiven. Her monthly payment is based on her income and is around $350/$400 a month. This is actually less than the monthly interest that accrues on it, but as long as she makes those payments on time they are eligible towards the 120 required on time payments for the forgiveness program. If we file jointly it will also include my income and will likely double our monthly payment. Solution: “Married but filing separately”
Which brings me to Issue #2
I’ve been maxing out my yearly contributions to my Roth for several years now and plan to (or at least, was planning too) for years to come. However, I learned that if we do the married but filing separately as stated above I won’t be able to get my AGI below the $10k that is required for that filing status. Furthermore, it is my understanding that if we get married this year and I have already contributed the $5500 for 2014, I would have to transfer it out of a Roth and into something else (probably a traditional). The one thing saving me from doing this for 2014 is that if we are married filing separately and I haven’t lived with my spouse at all during year (which I haven’t she stayed back home to work and I left on military orders) then I am subject to the filing single income limits. Does this mean if we are “married filing separate” and not living at all during the year we can both contribute $5500 to a Roth?
I’ve been told that a NON DEDUCTIBLE IRA contribution converted to a Roth could be that a loop hole for those “married filing separately”, is that true? Thanks!
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Permalink Submitted by Alan - IRA critic on Sat, 2014-03-22 21:10
If after the marriage you do not live together at any time for the remainder of the year, your modified AGI limit for regular Roth contributions is increased to that of a single taxpayer. Or if you made a non deductible TIRA contribution and converted it to a Roth IRA, the conversion would be tax free ONLY if you do not have any other non Roth IRA pre tax balance. Use the conversion route only if you do not qualify for the regular contribution because you did not live apart post marriage for the rest of the year.
Permalink Submitted by Patrick Ford on Sat, 2014-03-22 21:44
Thanks for the reply. Would we BOTH be subject to the single taxpayer limit, i.e. we could both contribute $5500? If so, that would be my plan for 2014. From 2015-2018 I believe, assuming there are no AGI limits for a NON DEDUCTIBLE TIRA contribution while filing as married but filing separately, I would do that and then convert to a Roth. I have a small amount in a TIRA currently, but will convert that to a Roth in 2014 and should have a clean slate for 2015 TIRA to Roth conversions. Does this all sound right?
Permalink Submitted by Alan - IRA critic on Sat, 2014-03-22 23:19
You are correct. But each of you will have to have earned income to cover your respective contributions because a spousal contribution is not allowed unless you file jointly. A spousal contribution is when a low earning or non working spouse uses the earned income of the working spouse to cover their contribution. At some point you should look into paying the 20k off sooner if filing jointly would result in sufficient tax savings to make that beneficial. Finally, if your wife makes a non deductible contribution she will also owe tax on the conversion if she has any pre tax non Roth IRA balance. You each need to file Form 8606 every year you make a non deductible TIRA contribution and any conversion is also reported on that same form.
Permalink Submitted by Patrick Ford on Sun, 2014-03-23 04:07
Thanks for the info! Great news! As for the $20,000 loan, it is actually a $85,000 loan but since she works in public service, she needs to make 120 on time payments and the remainder is forgiven. There is no option to pay the 120 payments off up front and have the balance forgiven, so we are bound to 120 on time payments. The new income based repayment plan the government offer actually has her payments less than the monthly interest that accrues on the loan, but it doesn’t matter provided she makes those 120 on time payments. Great deal if you’re in public service!