AAP suggestions for r2mybelovedhome1

r2mybelovedhome1 · Post by **r2mybelovedhome1** » Mon Mar 12, 2007 3:59 am

Desibabu,

I have a question similar to #5 & #25.

Here's my situation:

Both Wife and I are USC.

No kids as of now.

California Residents.

Wife has $6332 from previous employer 401K. Haven't rolled it over yet.

She converted from contractor to employee for new employer beg. Feb 2007. No 401K contributions yet.

Neither of us have any IRA's.

My 401 K is $2,492.

Our combined income is approximately $150 K per annum.

R2I Date: June end to Early July 2007.

Wife will quit end of May 2007. I will quit around June 15th.

Both will be RNOR for 2008 & 2009 (filing taxes for 2007 & 2008). I hope I did this calculation right. Wife and I will be 11+ years in US. Both have traveled since 2000 to India for a total of 108 days.

I was contributing 3% for the employer match but after reading various posts in the finance forum including this one, have changed to the max of 60%. I wish I had done this earlier to take maximum advantage of the RNOR period but didn?t know about it. I am hoping there's more I can do to take maximum advantage of what's available and wish to seek your help.

I also wish to post this in my AAP request but I understand you will be busy during the tax season. Hence the post here as I am hoping to do something to reduce my taxes for the year 2006 that I have yet to file.

My questions are, keeping the RNOR period in mind:
· Is it safe to contribute the maximum amount in IRA for wife and myself for 2006 to reduce taxes? Are there other contributions such as this to reduce taxes further?
· Do I do the same for 2007 right now?
· Is there anyway to play catch-up with my 401 K for this year by trying to retroactively contribute the max of 60% beginning Jan 2007. The 60% contribution will not take effect till April 2007. 60% will be approximately $3500 and I will only be able to contribute for April and May 2007, maybe half for June also?
· Can anything else be done retroactively to maximize tax savings during RNOR period?

Thanks in advance.

r2mybelovedhome1

Desi · Post by **Desi** » Tue Mar 13, 2007 7:33 am

r2mybelovedhome1,

[quote]I was contributing 3% for the employer match but after reading various posts in the finance forum including this one, have changed to the max of 60%. I wish I had done this earlier to take maximum advantage of the RNOR period but didn’t know about it. I am hoping there's more I can do to take maximum advantage of what's available and wish to seek your help.

I also wish to post this in my AAP request but I understand you will be busy during the tax season. Hence the post here as I am hoping to do something to reduce my taxes for the year 2006 that I have yet to file.

My questions are, keeping the RNOR period in mind:
· Is it safe to contribute the maximum amount in IRA for wife and myself for 2006 to reduce taxes? Are there other contributions such as this to reduce taxes further?[/quote]

You need to check your W2, there is a box (box #13) that says "retirement plan" - check to see that if it is checked?

Also check and see the same on W2 of your spouse.

If both of you are covered, and your MAGI is over $85,000, then it makes no sense to contribute for 2006 tax year. You have indicated that your combined income was about 150K last year, so your MAGI si most certainly over 80K.

Now if the box is not checked in even one of the spouses W2, then an IRA would be beneficial for that spouse. Check that and post here.
http://www.irs.gov/pub/irs-pdf/p590.pdf page 15 - 16 gives details.

But you can post the information about the retirement boxes on W2s and we can go from there.

[quote]· Do I do the same for 2007 right now?
· Is there anyway to play catch-up with my 401 K for this year by trying to retroactively contribute the max of 60% beginning Jan 2007. The 60% contribution will not take effect till April 2007. 60% will be approximately $3500 and I will only be able to contribute for April and May 2007, maybe half for June also?
[/quote]

To suggest an appropriate solution for you requires more information.

For 2007, both you and spouse are covered by employer plans.
Your employer matches 3%.
Even though her employer has 401K, is she not eligible because of being a new employee? How much does that employer match - when will she become eligible?

What is your combined estimated income for 2007 since you will be leaving in mid 2007. I am assuming you do not own a house, so do not have a mortgage deduction. These figures will allow to assess your marginal tax bracket.

It is important to know this, however in all likelihood total tax savings are going to be greater than 10% and you will be able to get away with zero taxes and 10% penalty during RNOR based on the information provided.

Please provide the information, so I can give definitive replies.

r2mybelovedhome1 · Post by **r2mybelovedhome1** » Wed Mar 14, 2007 12:32 pm

Desibabu, thanks for your help.:)

Desi;12138r2mybelovedhome1,

You need to check your W2, there is a box (box #13) that says "retirement plan" - check to see that if it is checked?

Also check and see the same on W2 of your spouse...

Now if the box is not checked in even one of the spouses W2, then an IRA would be beneficial for that spouse. Check that and post here.
http://www.irs.gov/pub/irs-pdf/p590.pdf page 15 - 16 gives details.

But you can post the information about the retirement boxes on W2s and we can go from there.

[/quote]

I checked the W-2's. Box #13 on mine is checked, it is not checked on my wife's.

I want to highlight the fact that the only contribution to any retirement plan for the year 2006 between both my wife and me, was done by me, which was $1904, all towards my 401K. My wife didn't contribute to any 401K plans and neither of us have IRA accounts. The amount in my wife's 401K plan is from a previous job she left over 2 years ago.

Can we both still contribute to the IRA for 2006, given that my 401K contribution was so low?

[quote]
If both of you are covered, and your MAGI is over $85,000, then it makes no sense to contribute for 2006 tax year. You have indicated that your combined income was about 150K last year, so your MAGI si most certainly over 80K.
[/quote]

I don't remember exactly what MAGI is but I am assuming it has to do with Adjusted Gross Income (I will look it up). I checked the combined income for both of us and it is approx $157K.

[quote]
For 2007, both you and spouse are covered by employer plans.
Your employer matches 3%.
Even though her employer has 401K, is she not eligible because of being a new employee? How much does that employer match - when will she become eligible?
[/quote]
My wife is eligible and the employer will match 5%. She is eligible to participate now.

[quote]
What is your combined estimated income for 2007 since you will be leaving in mid 2007. I am assuming you do not own a house, so do not have a mortgage deduction. These figures will allow to assess your marginal tax bracket.
[/quote]

You are right, we do not own a house. Our combined estimated income is $56250 for 2007. Interest income and capital gains may be another 2 to 3K, so in all about $58250.

Desi · Post by **Desi** » Wed Mar 14, 2007 6:48 pm

r2mybelovedhome1,

[quote]I checked the W-2's. Box #13 on mine is checked, it is not checked on my wife's.[/quote]

This means in 2006, you were covered by employer plan and she was not covered by employer plan.

[quote]Can we both still contribute to the IRA for 2006, given that my 401K contribution was so low?[/quote]

Yes, both of you can contribute. However should you?

Since you were covered by retirement plan at work and your MAGI exceeded $85K, your contribution will not be tax deductible, so it does not make much sense in contributing in your situation. Do not contribute for self.

In case of your spouse, contribution makes no sense if MAGI was over $160K as it will not be deductible.

To determine if your MAGI is over $160K, go thru worksheet on page 17 of the following link http://www.irs.gov/pub/irs-pdf/p590.pdf

If you MAGI is under $150K, then your spouse should contribute full $4000 towards IRA for 2006. If MAGI is between 150K and $160K, then spouse will be allowed a partial deduction. So in this case your contribution should be only the amount for which the spouse is allowed deduction. To calculate that you need to go to page 19 of the above link and calculate.

[quote]My wife is eligible and the employer will match 5%. She is eligible to participate now.
[/quote]

You and spouse must contribute to get full benefit of employer match. Further you should contribute the maximum you can. You will save 15% in Federal taxes plus the State of California taxes and when your withdraw this money, in all likelihood based on information provided, your taxes will be zero on this income and will pay 10% in penalty. This is assuming that your combined Indian income does not exceed about 30 to 35 lacs (earned income exclusion)

[quote]
You are right, we do not own a house. Our combined estimated income is $56250 for 2007. Interest income and capital gains may be another 2 to 3K, so in all about $58250.
[/quote]

With 401K contributions, that number will drop further and this means that for 2007 both you and spouse should be able to contribute each $4000 and take a full deduction.

Before you leave for India, rollover the 401K into an IRA. Give the IRA custodian the Indian address ( you do not want any state taxes witheld) and when you withdraw, any taxes witheld on the IRA will be refundable to you when you file taxes.

During 2008, you will get two personal exemptions and a standard dedcution - these amounts will be about 17K to 18K. As long as your withdrawal from IRA in 2008, combined with any other passive income (interest, capital gains etc from US and Indian assets) is less than 17K to 18K and your combined Indian income is under approximately 30 to 35 lacs, your federal taxes will be zero and you will have no state taxes and you will have 10% penalty which is called additional taxes on the IRA withdrawal. Same thing for 2009.

r2mybelovedhome1 · Post by **r2mybelovedhome1** » Thu Mar 15, 2007 10:40 am

Desibabu,

Thanks for the clear and detailed advice. It is really very helpful.

I am glad that the above steps will add to the R2I savings.

r2mybelovedhome1

r2mybelovedhome1 · Post by **r2mybelovedhome1** » Fri Mar 16, 2007 12:11 pm

Desi;12502r2mybelovedhome1,

You and spouse must contribute to get full benefit of employer match. Further you should contribute the maximum you can. You will save 15% in Federal taxes plus the State of California taxes and when your withdraw this money, in all likelihood based on information provided, your taxes will be zero on this income and will pay 10% in penalty. This is assuming that your combined Indian income does not exceed about 30 to 35 lacs (earned income exclusion)
[/quote]

Desibabu,

I went ahead and enrolled for the maximum contribution allowed for my wife's 401K. I put 100% in a money market fund, briefly described as below:

The fund invests in short-term debt securities with high credit ratings known as money market instruments. These securities are issued by U.S. and foreign corporations, governments, banks and U.S. agencies such as Fannie Mae and the Student Loan Marketing Association. These securities are considered low risk due to the financial strength of the issuers and the short-term maturity of the investments.
The expense ratio for this investment option is 0.09% (as of 09/30/2005).

I just wanted to confirm with you that I did the right thing, since the money will be in there through end of May 2007 after which my wife will quit her job. All other choices I had were either Stock Funds, Index Funds, Bond Funds and other specialty stock and bond funds. There was no option to leave it in cash.

TIA,

r2mybelovedhome1

Desi · Post by **Desi** » Fri Mar 16, 2007 6:55 pm

Yes, Money market is the right vehicle for this.