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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to how to retire on time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire On Time, which you can grab today on Amazon, or you can grab a free copy by going to www.howtoretireontime.com. My name is Mike Decker. I'm the author of the book, How to Retire On Time, but I'm also a licensed financial adviser, insurance agent, and tax professional. When it comes to finance, we can pretty much cover it all.
Mike:Now that said, please remember this is just a show, as in not financial advice. So if you want financial advice, you can always request analysis from our team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Franson. David, thank you for being here.
David:Yeah. Happy to be here as always.
Mike:Yeah. David's gonna read your questions, and I am going to do my best to answer them. You can always submit your questions by texting them to (913) 363-1234. Again, that number, (913) 363-1234, or you can email them to heyMike@howtoretireontime.com. Let's begin.
David:Hey, Mike. Should my wife and I file married but separate so we can have one of us provide household income while the other does IRA to Roth conversions?
Mike:This is a very good tax question. Yeah. And it's because it's exploiting the tax filing designation that no one seems to understand.
David:Okay.
Mike:Yeah. So we all know if filing single, we've all been single at some point in our life.
David:Sure.
Mike:Yep. We've all, or I should say, those all those who have been married, married filing jointly, there's alleged tax benefits to it. Okay? And then there's these other two. Married filing separate.
Mike:Yeah. You might think, well, why do they do that? Because the tax brackets are lower, it's not as competitive. And then you've got the head of household. Sure.
Mike:So head of household, kind of like for divorced people, they're single, but that's a situation for another maybe another time we'll talk about that. Okay. Yeah, you got kids in the house, you're taking care of majority of the expenses and so on. Married, filing separate. Yeah, what is that?
Mike:So the idea is you're a combined household, you've got two different incomes, and you wanna file separately. So let's make this simple, and let's say husband and wife, the wife just retired, has a couple hundred thousand in their IRA, and the husband's still working for another couple of years, and he makes 200,000. Okay? So if they do married filing joint, they're going to pay 200,000, whatever the tax is is on that, and then her conversions will then happen at the 20 whatever percent tax bracket, 22%, twenty four %, whatever it's gonna be at the time that you listen to this recording, 22% right now. Okay.
Mike:So that's kind of a crappy tax bracket conversion. Know, you're taking your IRA, let's say you take 50,000, 20 2 percent goes to taxes, federal taxes, and then the rest goes over to your Roth account. You're losing a lot of your retirement account money. So what you could do with your W2 income, you've got one, you could do married filing separately. One spouse is providing all the household income, and his taxes might increase a little bit, because he's now married filing separately.
Mike:So he's gonna have a higher tax bill in his specific situation.
David:Okay.
Mike:But then you have more conversions for the other spouse, let's say in this situation, the woman, who's now doing IRA to Roth conversions at the 1012%. Uh-huh. So they're keeping more of their retirement accounts. Uh-huh. You see how that plays out?
Mike:Yes. The conversions are at the lower tax bracket, the w two income is at a higher tax bracket, but when all is said and done, you typically pay in these situations, if it's implemented correctly, and if it's the right situation, you'll pay $23,000 less overall in taxes, plus you'll have more money that stays in your qualified accounts, your IRA or your Roth. Yeah. Which is, that's the goal. You wanna keep your money in your retirement accounts, because they grow tax free, and then if it's Roth, it pays out tax free as well.
Mike:So it is a very compelling strategy in that situation. Any questions on that?
David:No, I think that crystallized my mind very good. So the goal is to keep more money growing inside the market, right? If you have to take it out to pay taxes, and there's less sort of funds in there to compound and grow. Right?
Mike:Yeah. So it's divide and conquer. One spouse is doing the income from their accounts under their Social Security, their w two income, or their income from their retirement accounts, and the other one's doing the conversions. Then you could switch if you wanted to, I mean, you can play this in a number of different ways, but another way that you would want maybe to file separately, is let's say you've got one spouse who's working in 62 years old
David:Okay.
Mike:And making 200 and whatever thousand dollars a year, or maybe there's a household or whatever it is, and then the other spouse is, let's say 66 years old on Medicare.
David:Okay.
Mike:Okay. So you might want to do married filing separately, so the person on Medicare doesn't get hit with IRMA or Medicare surcharges.
David:Yes. That makes sense. Yeah. Because if you have Medicare and it costs a certain amount every month, but if you have enough income, you pay You pay more. Yeah.
David:Surcharges are
Mike:Because if you have more taxable income, then the government says, well, you should pay your fair share, and so they will give you a surcharge. They'll charge you more for your Medicare premiums.
David:Uh-huh. Yes. Yes.
Mike:And you know what's interesting? I've had maybe one or two people in my decade of doing this ask about this. That seems low. And here's my theory behind it. CPAs don't really know your IRA situation.
Mike:Many times they don't know your qualified accounts because they don't show up on your tax returns. They don't know if you need to be working on this, they're just there to and I'm oversimplifying it. Sure. Love CPAs, they're my kind of people. Yeah.
Mike:But they're there to do your tax returns. Most people are hiring your CPA to do the tax return, and that's it. Most people aren't saying, well, hey, can I pay you an hourly rate to look at all of my future tax planning, and you might not be able to find anything, but maybe people are doing that? They're just file my taxes, and that's it. And then you've got the financial advisor, which many times in the disclosure says, we can't offer tax advice.
Mike:You know what qualifies tax advice? Hey, maybe you should file separately, married filing separately, so you can do these IRA to Roth conversions in this way, or you can avoid Irma in this way, or whatever the situation might be. That would kind of qualify as tax advice.
David:Yeah.
Mike:So they can't tell you. So you are damned if you do, damned if you don't, as they say. Yes. This is why it's so important to work with a holistic team of people that are in sync, they're working together, they're having the conversations. I mean, these are thousands of dollars every year that you could be missing out or inefficiencies, so you get less out of your money.
Mike:Mhmm. There are situations where it may work, and there's many situations where it doesn't make sense. I mean, here's how you figure it out. This is what we do every year when we're doing our income planning for the following year. So in October of this year, we bring in all our clients one by one, and we say, all right, next year, if we were to do your IRA Roth conversions, if we were to tackling Medicare, we go down the list of all the different things, and the income that they need, and where it's gonna come from based on market sentiment, have the markets gone up or down, we're gonna say, all right, if you file this way in taxes, this is kind of your situation, but if we filed married filing separately, it might be this.
Mike:We just have to run multiple scenarios to figure out which one's gonna be best.
David:Yeah. And so does this only work if both spouses are working? If if one spouse says, like, you know, stays home, whoever it is, mom or dad, and doesn't work, is there ever a case where it would be advantageous if only one spouse has income to do married filing separately?
Mike:If the spouse that's not working has qualified accounts, like IRAs, then maybe.
David:Okay.
Mike:But if one spouse, let's say the homemaker in the traditional sense, doesn't have IRA assets that are saved, never really worked, I mean, that's the situation where it might not make sense, because then you're gonna file separately, and then the individual who is working or bringing in income or taking income from the retirement accounts is gonna have a higher tax bracket, because the married filing separately is similar to the single tax bracket.
David:I see.
Mike:So again, this tax planning every single year makes a ton of sense. There's a lot of people that will come in and say, hey, want a one time plan, and I'm gonna do it myself, and I say, great. So you're gonna do the tax planning, and run this different scenarios every single year. You're gonna and I go down the list, they say, oh, that's a lot. I say, Well, if you do it, it could save you thousands of dollars every year.
Mike:Yeah. That's when many times they'll sober up and either get a comprehensive relationship, or they'll just buy the software and do it themselves. Yeah. I'm all for self reliance, independence, people doing things themselves. Right.
Mike:You have to want to do it. Yeah. You have to want to put in the time. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast.
Mike:Just search for How to Retire On Time! Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date.
Mike:Go to www.yourwealthanalysis.com today to learn more and get started.