I'm thinking about 2010 Taxes

[creditcardfree]

I'm thinking about 2010 taxes because my husband is likely to be deployed to a combat zone for most of that year. While it is a negative for our family as a whole, it is a positve for our finances.

His basic pay which is currently taxable, becomes non taxable income.

My husbands W-2 income could be as little as $16,500 for the full year. Compare this to 2008, when it was a little over $62,000.

I'm thinking we need to convert our remaining traditional IRA money to Roth's during that year. Currently, we have just a little over $29,000 that is in rollover IRA accounts.

It seems that we could effectively convert this money to Roth IRA's and not owe any taxes. Sound right? I think I did this back in 2004, too, but the amount was far less.

[kork13]

Not necessarily owe no taxes, but definitely very little. You would still owe some taxes, but it will be far less, because you're able to convert most of it at the 15% bracket. Sounds like a great plan, hopefully it works out for you.

[creditcardfree]

We have two kids, so I think after the child tax credit, it might actually be zero.

Of course, if the market goes up significantly, that changes the amount that we would convert.

[disneysteve]

I think that as 2010 approaches, we're going to see more and more "should I convert" threads around here. Hopefully, there are some good online calculators to help people run the numbers. I know I'll be one of the people wondering if we should convert our traditional IRAs to Roths next year. I am going to discuss it with my accountant when I do my 2009 taxes.

[creditcardfree]

I think that as 2010 approaches, we're going to see more and more "should I convert" threads around here. Hopefully, there are some good online calculators to help people run the numbers. I know I'll be one of the people wondering if we should convert our traditional IRAs to Roths next year. I am going to discuss it with my accountant when I do my 2009 taxes.

Very true, Steve. I hope your accountant gives you good news!

I just realized, that my husband's tsp contributions will be considered non taxable contributions as well. We won't have to pay taxes on those when they are withdrawn. The last time he was deployed he was not contributing to the tsp.

I'm wondering, if those unemployed, earning far less with unemployment could take advantage of the lower income and convert part of their rollover ira's to roth's? It would be something to consider towards the end of the year, when one has a better idea about total income.

[kork13]

Oh, when your husband deploys, make sure he gets into the Savings Deposit Program. It's a guaranteed 10% interest for the full time he's deployed, and earns interest until 90 days after he comes back. You can put up to $10k in, so take advantage of it if at all you can make it work.

[creditcardfree]

Oh, when your husband deploys, make sure he gets into the Savings Deposit Program. It's a guaranteed 10% interest for the full time he's deployed, and earns interest until 90 days after he comes back. You can put up to $10k in, so take advantage of it if at all you can make it work.

Thanks for the reminder. We are planning to save quite a bit of cash while he is away. I'm sure I won't be able to find 10% anywhere else!

[ktmarvels]

I just realized, that my husband's tsp contributions will be considered non taxable contributions as well. We won't have to pay taxes on those when they are withdrawn.

I'd double check on this. It was my understanding that ANY money put into a TSP would be taxed when withdrawn (even if "tax-free" money is put in). On the other hand, if you take that tax free money and put it in a Roth, you will never have to pay taxes on it.

[ktmarvels]

Oh, when your husband deploys, make sure he gets into the Savings Deposit Program. It's a guaranteed 10% interest for the full time he's deployed, and earns interest until 90 days after he comes back. You can put up to $10k in, so take advantage of it if at all you can make it work.

I really wanted to do this when DH deployed, however we weren't able to. The explanation I received (from DH) was that he's in the Navy and apparently the program is run by the Air Force. So he could contribute to this, but it would have been a little tricky getting the money out. So we didn't end up doing it, but I sort of wish that I'd been able to find out if that was really true.

[kork13]

I'd double check on this. It was my understanding that ANY money put into a TSP would be taxed when withdrawn (even if "tax-free" money is put in). On the other hand, if you take that tax free money and put it in a Roth, you will never have to pay taxes on it.

Partly correct, partly mistaken. From the TSP's website:

TSP accounts for members of the uniformed services may include contributions from pay that is subject to the combat zone tax exclusion. That pay, earned in a combat zone, is exempt from Federal income tax. Consequently, TSP contributions from that pay are also tax-exempt. However, the earnings on those contributions are taxable when they are distributed. Therefore, if you receive a payment from an account that has both tax-deferred and tax-exempt contributions, your distribution will be paid in the same proportions as your tax-deferred and tax-exempt balances, and the TSP will report the tax-exempt portion separately on IRS Form 1099-R.

If you're not already fully-funding a Roth, ktmarvels is right, the Roth is the better option. But if you're already doing that, I think the TSP idea is still a great one.

I really wanted to do this when DH deployed, however we weren't able to. The explanation I received (from DH) was that he's in the Navy and apparently the program is run by the Air Force. So he could contribute to this, but it would have been a little tricky getting the money out. So we didn't end up doing it, but I sort of wish that I'd been able to find out if that was really true.

The SDP is actually run by the Defense Finance and Accounting Service (DFAS), which is separate from any single military service -- it works directly under the DoD, for all branches. I'm not sure what your husband was told, but he is absolutely eligible to participate while deployed, and it's actually fairly easy (both putting money in and getting it out). Here's some info that explains it better than I can: Explanation of the SDP and the DFAS brochure for the SDP.

[creditcardfree]

In our case, we already max out our Roth IRA's each year and put the remaining amount we budget into the tsp. I'm just glad they keep track of contributions made in a combat zone, it would be a complete disadvantage to put that money in and have it be taxed when it otherwise would not have been.

kork, putting the money in requires you to take a check to the finance office right? So, I can simply send a check with my husband and he can put the full $10K in immediately upon arrival, barring the work load, of course!! There is not a way for me to handle a direct deposit from home, if I read correctly.

[Taxplanr]

online Roth conversion calculators are flawed

I think that as 2010 approaches, we're going to see more and more "should I convert" threads around here. Hopefully, there are some good online calculators to help people run the numbers. I know I'll be one of the people wondering if we should convert our traditional IRAs to Roths next year. I am going to discuss it with my accountant when I do my 2009 taxes.

Online Roth conversion calculators do not work because they do not calculate the effect the non-taxable income will have on your schedule A itemized deductions.

[kork13]

kork, putting the money in requires you to take a check to the finance office right? So, I can simply send a check with my husband and he can put the full $10K in immediately upon arrival, barring the work load, of course!! There is not a way for me to handle a direct deposit from home, if I read correctly.

not quite... from the SDP brochure, "Deposits may not be more than the unalloted pay and allowances per month." So basically, you can't put in more during a given month than he gets paid that month. It will probably take 2-3 months for you to max out the SDP.

As for how you can fund it, he can hand the finance office a check each month, or he can set it up with them, then you can start an allotment for it online at the MyPay website. I've never done it yet, so he would have to ask exactly how the online method works....

My best recommendation would be for him to just go to the finance office once he deploys, and they can explain exactly how everything works, and set it up for him real easy.

[creditcardfree]

not quite... from the SDP brochure, "Deposits may not be more than the unalloted pay and allowances per month." So basically, you can't put in more during a given month than he gets paid that month. It will probably take 2-3 months for you to max out the SDP.

Darn. Just under two months for us, so I guess that is no so bad. Thanks for all your replies, kork.

[Alex_Adviser]

Because the Roth is potentially better than the traditional IRA, it may make sense for you to convert a current traditional IRA into a Roth. To do so, you will have to pay taxes on your old IRA, but there will be no penalty for early withdrawal. Whether its a smart move will depend on your income tax rate today versus that in retirement; how you will pay the income tax bill due on the conversion; how long the Roth IRA will remain untouched; and the size of the IRA coupled with your desires for your estate.