Mcodox

Side question....anyone got an opinion on best tax strategy for sole versus joint account ownership in non-tax advantaged accounts?

I am setting up Vanguard general investing account and just wondering if there is a good reason to create 2 separate individual accounts rather than 1 joint account - from a tax standpoint and ignoring any personal risk bias relating to 'ownership' of investments in a married couple. We are married filing jointly.
Thanks!

kodokan

Here are the 'can deduct' income limits for a Spousal IRA: https://www.irs.gov/Retirement-Plans...t-Plan-at-Work

I, for example, come under the box for 'spouse is covered by a plan at work'; he is the only income earner, and has a 401k. So I can only deduct an IRA contribution if his modified AGI is less than $194k ($184k for a full deduction). Sounds like your set-up is the same.

kodokan

I'm not aware of it making any difference to income taxes. There's a possibility it might make a difference to estate taxes *guessing a bit here, as estate planning is on this year's to-do list*. A joint account is usually set up where if you die, the balance passes seamlessly to the other party (joint with right of survivorship, I think it's called), and as such is outside of the need for probate/ estate taxes. Separate accounts might mean it is considered part of your estate, and needs to be processed accordingly.

*moving beyond guessing into the realms of 'something I vaguely read once'* The federal exemption for estate tax is north of $5m; that could change depending on the political will of the time. Non-US spouses don't benefit from unlimited transfers like US spouses do, in case we skip the country and the government doesn't get its cut. I'm assuming here that your spouse is not a US-citizen.

Our taxable Vanguard account is joint; can't think of a tax reason for it not to be.

Actually, just had another thought - if you currently have a large lump of money in your name, you can't just transfer it into your non-US citizen wife's name without triggering a gift tax liability. The limit in 2015 was $147k.

And another thing to remember is that taxable accounts are somewhat tax-advantaged - you can do tax loss harvesting, and reduce your income base for that year by up to $3k (and beyond, losses permitting, as they can be rolled over). This may become a useful trick over the next couple of years.

durham_lad

Sole versus joint only really matters if/when you return to the UK. For us I have pensions which takes me close to the UK 40% band. If we had left our after tax accounts in joint names then I would be well into the 40% band with the dividends. By putting those accounts in my wife's name we maximize the use of her allowances and expect to pay no UK tax on that income until she starts drawing her US SS which, in combination with her SS, will put her into the basic, 20%, bracket.

kodokan

Good point, hadn't thought of the UK end of things. It's been a while; remind me just in case we go back - how does it work there for joint accounts? Would we declare half of the dividends/ capital gains each?

Mcodox

Yes, for joint accounts in UK you have to split the dividends / cap gains / interest between both parties and calculate losses/gains accordingly.

Mcodox

Interesting point - thanks - so basically there could be additional benefits of using individual / sole accounts if there is a spouse that has been a non-working party relative to the main earner where he or she has significant retirement assets/schemes already in sole name.

I dont think that probably applies in our case as we both worked until recently with own schemes and have used ISAs on top.

The difficulty is knowing your future and planning accordingly

goatherder

I'm in a similar situation here. Not sure how long we'll be around in the US but no plans to actually move.

I max out my 401k fully (17K or whatever it is) - you can't beat a 100% return with the matching - my income exceeds the limits for any other traditional IRA / Roth contribution.

I then also put 5,500 for me and the better half each year into a non-deducted IRA. We've toying with converting those to Roth IRA's but haven't really come to a decision on that - depends on whether we think our income will be less in retirement than now.

We also have a high deductible health plan where we contribute 6560 each year and do not touch it for the medical deductibles - pay all of that out of post tax income. The HSA will be used for retirement medical expenses.

With respect to the 529 plans we have not contributed. My view is that the investment choices in those generally plans are poor. My current thought is that education costs for the kids could be paid out of the Non-Deductible IRA. Funds withdrawn from the IRA are not subject to penalties if they are used for education expenses currently. I will have to pay tax on the earnings portion of that IRA - which I wouldn't in the 529 plan but I think I can make more income investing in different investment choices than the 529 offers. This all assumes that personal funds will not be available to pay for college.

I also have a joint taxable investment account. Its in both names. Hadn't thought about splitting the account there - its a very good point!

kodokan

There may be a time crunch on this, to do it smoothly. I've not done a Backdoor Roth myself yet, but the accounts I've read talk of the need to do it quickly - usually the next day or so - to ensure that the amount is solely contributions, and it hasn't yet earned anything. I don't know the implications of this; whether it stops you being able to roll it over, or just makes the accounting/ reporting more complicated.

Edit: got curious and had a little hunt. It doesn't seem to be a real bother having a small amount of earnings, other than ensuring they're correctly reported for tax as they're rolled over. The main problem seems to be if you already have a Traditional IRA that's tax-deferred, due to the way it pro-ratas the rollover amount across the different accounts: http://thefinancebuff.com/the-backdo...te-how-to.html

goatherder

Yes that the pickle that is holding me back - my wife has some rolled over 401k's to traditional IRA's and part of those will become taxable if you a roth conversion. Add to that my expectation that income in retirement will be less it doesn't make a lot of sense to do a conversion for our scenario.

durham_lad

For a non-deductible IRA then future tax rates really have nothing to do with anything if you think about a Roth.

If you have $5,500 each to invest for retirement you could;

Put that money into after tax investments and pay tax on the growth from now until you withdraw (interest, dividends and capital gains).

Or you could put that same money into the same investments in an IRA and pay tax on the growth only when you withdraw it after you are retired and in a lower tax bracket.

Even better you could put that money into an IRA and same day or next day convert it to a Roth and never pay any tax at all on the growth.

As was pointed out you need to have no other tax deferred IRA's to be able to convert the whole amount without having to pay tax on some of the other existing IRA money.

e.g.
I retired in March 2010 and had a very tidy sum in my 401(k), all tax deferred. I also had a much smaller chunk of money in a non-deductible IRA, and the growth on that was ~$20k. I left the money in the 401k for 2010 and converted the whole amount in the IRA, paying tax on $20k. In 2011 I then rolled over the 401k into an IRA. If I had rolled the 401k over in 2010 it would have vastly diluted the tax free portion of all the IRA's I owned.

Mcodox

So do you think there is a catch / it makes sense if I look to do 2 years of contributions simultaneously for a traditional IRA (non-deductible) with a soon to follow backdoor roth?
(I have 2015 & 2016 still available before April I gather)

Thanks for all your comments on this thread.

FatFrank

Wait, is that the best strategy for spending the dollars from the high deductible Healthcare Savings Account (HSA)?

Paying a lot of tax now, I always thought it best to use those HSA dollars now, so to effectively pay for my current medical expenses with tax-free dollars, and only save that annually that I don't use. Reason being that while I'm working my after-tax income actually costs a lot more than it will do later when I retire?

kodokan

Moderately more complicated, but completely doable.

You may find these articles helpful:

Backdoor Roth: A Complete How-To
Make Backdoor Roth Easy On Your Tax Return

kodokan

It's a reasonable approach, if you've maxed out all other retirement accounts and all you'd otherwise be doing with the money is saving it in a taxable account. Say I have $13k to save, and put $6.5k in the HSA (rounding for ease) and $6.5k in a taxable account. If I then have a $3.5k medical expense, it'll probably work out better to end up with $6.5k HSA and $3k taxable, invested for the next 10/20/30+ years.

Even if you expect to be at 0% capital gains when you retire and pull the money out of the taxable account, you'll have (probably) paid a fair bit of tax on the dividends and capital gains distributions for the years/ decades along the way.

One factor to consider might be the investment choices in your HSA. Don't forget that even if you're locked to a certain provider through work, to get the payroll taxes cut, you could funnel the money out by doing an annual rollover to a new, more advantageous provider.

Interesting little HSA fact I only learned this week: I knew there was a $1k catch-up contribution at 55, but only for the actual person in whose name the account is. What I didn't know is that each spouse can open a separate HSA account and, once over 55, split up the annual family max of $6,750 and add the $1k EACH. This applies even in my case, where I don't have my own HD health insurance policy but am named on hubby's. I'll have to see in a decade whether the resulting tax break is worth the additional admin.