Married Filing Separately - Roth IRA oops

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timboktoo
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Married Filing Separately - Roth IRA oops

Post by timboktoo » Mon Feb 19, 2018 10:46 pm

I just recently filed Married Filing Separately but didn't realize that this meant I was excluded from Roth IRA contributions for 2017. We filed separately because she has a student loan that's setup as Pay As You Earn.

Loan amount: $57,000
Interest rate: 7%

So, now we're talking about how to deal with it. As I see it, there a few different options:
  • 1. Change the filing to Married Filing Jointly. Switch back to normal loan payments for the next 10 years with the current interest rate.
    2. Change the filing to Married Filing Jointly. Refinance to a lower payment with another student loan company and pay off the loan over the next 10 years.
    3. Change the filing to Married Filing Jointly. Use the "debt snowball" approach to pay off the loan over the course of 1 year.
    4. Change the filing to Married Filing Jointly. Use the money from the Roth IRA to pay off the student loan immediately.
    5. Keep the filing as-is. Remove contributions from last year. Invest contributions that would have been made to a Roth IRA into taxable instead from now until the time the student loan is forgiven.
My personal preference is option 3. I like the idea of paying off the loan quickly together, rather than having a $600 monthly payment hanging over our heads. Thoughts?

- Tim

randomguy
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Re: Married Filing Separately - Roth IRA oops

Post by randomguy » Mon Feb 19, 2018 10:49 pm

What are the tax savings/penalty from filing jointly? How do they compare to whatever savings you expect to gain from pay as you earn?

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timboktoo
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Re: Married Filing Separately - Roth IRA oops

Post by timboktoo » Tue Feb 20, 2018 7:49 am

The penalty of filing jointly in this case is that her student loan payment will rise greatly, as it would be based on dual incomes and mine is considerably higher than hers. We had chosen the path we did (filing separately) as a means of keeping her student loans from impacting us both. She's in the social services field, so she makes little and works much, and so long as she stayed in that field we could expect that to be the case. So, we had been increasing her 401(k) contributions and planned to file separately, to keep her income as low as possible.

If I didn't adequately answer your question, let me know. I don't have the specific numbers to compare with though.

- Tim

BogleMelon
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Re: Married Filing Separately - Roth IRA oops

Post by BogleMelon » Tue Feb 20, 2018 7:57 am

My understanding is if you choose not to pay as her earnings is too low, then interest would accumulate anyways, am I right?
7% interest is high. And if interest is accumulating anyways, I would pay off this loan first before thinking about any investing (except employer match if any). That is a 7% guaranteed return with no risk. You wouldn't find this in any investing fund!
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

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timboktoo
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Re: Married Filing Separately - Roth IRA oops

Post by timboktoo » Tue Feb 20, 2018 8:01 am

The loan is also forgiven after 20 years, if you follow pay as you earn. The amount you pay could theoretically be lower than the original loan in cases like my wife's, since she makes so little. That's why we originally chose this course to begin with.

- Tim

csm
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Re: Married Filing Separately - Roth IRA oops

Post by csm » Tue Feb 20, 2018 8:08 am

I don't know if you have an option to "undo" the Roth contribution now and then instead make a non-deductible Traditional IRA contribution. Once you've done that, you can backdoor the tIRA to a Roth.

Even if you cannot do it on the erroneous 2017 contribution, it may be something to consider for 2018 if you want to file separately.

Please, other Bogleheads, correct me if I'm wrong (or OP, check with your CPA). But I believe you can always contribute to a non-deductible tIRA and then backdoor to the Roth IRA.

retiredjg
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Re: Married Filing Separately - Roth IRA oops

Post by retiredjg » Tue Feb 20, 2018 8:14 am

Twenty years? I'm not sure I'd plan to file separately for 20 years for a loan that you can actually pay off in a year if you choose to. How much of the loan would you expect she won't have to pay?

I think you have another option. Recharacterize your Roth contribution to tIRA and convert. This assumes you have no other IRAs (except Roth) to get in the way. It also assumes your contribution to Roth was direct, not by conversion (in which case you don't have an issue anyway).

retiredjg
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Re: Married Filing Separately - Roth IRA oops

Post by retiredjg » Tue Feb 20, 2018 8:18 am

I also would wonder about spending 20 years in a social service field at very low pay and long hours. I'd guess a significant number of people will move on to something with less wear and tear after 10 years or so.

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CyclingDuo
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Re: Married Filing Separately - Roth IRA oops

Post by CyclingDuo » Tue Feb 20, 2018 8:27 am

timboktoo wrote:
Mon Feb 19, 2018 10:46 pm
I just recently filed Married Filing Separately but didn't realize that this meant I was excluded from Roth IRA contributions for 2017. We filed separately because she has a student loan that's setup as Pay As You Earn.

Loan amount: $57,000
Interest rate: 7%

So, now we're talking about how to deal with it. As I see it, there a few different options:
  • 1. Change the filing to Married Filing Jointly. Switch back to normal loan payments for the next 10 years with the current interest rate.
    2. Change the filing to Married Filing Jointly. Refinance to a lower payment with another student loan company and pay off the loan over the next 10 years.
    3. Change the filing to Married Filing Jointly. Use the "debt snowball" approach to pay off the loan over the course of 1 year.
    4. Change the filing to Married Filing Jointly. Use the money from the Roth IRA to pay off the student loan immediately.
    5. Keep the filing as-is. Remove contributions from last year. Invest contributions that would have been made to a Roth IRA into taxable instead from now until the time the student loan is forgiven.
My personal preference is option 3. I like the idea of paying off the loan quickly together, rather than having a $600 monthly payment hanging over our heads. Thoughts?

- Tim
Recharacterize your IRA.

https://www.irs.gov/retirement-plans/ir ... tributions

clemrick
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Re: Married Filing Separately - Roth IRA oops

Post by clemrick » Tue Feb 20, 2018 10:10 am

Pay it off and be done with it. I have recently seen threads online asking if anyone ACTUALLY has had their loans forgiven and the response so far is that it is a lot of paperwork and no forgiveness yet. Going through all kinds of financial gyrations to hope for forgiveness in the VERY distant future, isn't worth it.

an_asker
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Re: Married Filing Separately - Roth IRA oops

Post by an_asker » Tue Feb 20, 2018 10:20 am

retiredjg wrote:
Tue Feb 20, 2018 8:14 am
Twenty years? I'm not sure I'd plan to file separately for 20 years for a loan that you can actually pay off in a year if you choose to.[...]
+1!

sco
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Re: Married Filing Separately - Roth IRA oops

Post by sco » Tue Feb 20, 2018 10:34 pm

How much extra in Tax are you paying this year filing this way? What is that x 20?

JGoneRiding
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Re: Married Filing Separately - Roth IRA oops

Post by JGoneRiding » Tue Feb 20, 2018 11:01 pm

Given the tax implications there is no way i would file separately for 20 years. So you might as well bite the bullet and lower the it rate and either set it for a 10 year plan or try to get it done asap

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timboktoo
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Re: Married Filing Separately - Roth IRA oops

Post by timboktoo » Wed Feb 21, 2018 4:33 pm

Thanks, everybody.

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