No aversion to conversion: IRA to Roth
Gay and lesbian couples who choose to have children often do so later in life. After all, no children are conceived “accidentally” in LGBT families. A parent who chooses to stay home to raise the children can take advantage of a great tax break. It’s difficult to adjust to not having an income, but one upside is that it puts you at a very low — even zero — tax bracket. If you have a 401(k) from previous employment or a traditional IRA, take advantage of the opportunity to transfer the money into a Roth IRA. You’ll have to pay income tax on the amount transferred, so be sure to have money on hand to cover the taxes. Once money is in a Roth, you never have to pay tax on it again. You don’t have to transfer the entire amount at one time, so if you plan to stay home for the first three years of Junior’s life, you can break up the transfer over the three years — that should help keep you away from the higher tax brackets.
Example: Susan and Carol are expecting a new baby and plan to have Susan stay home for five years until the child enters kindergarten. Carol has a good paying job and can cover the bills, if they tighten their belts a bit. Susan previously worked for seven years in telecommunications and has $50,000 in a 401(k) with her former employer. Susan can transfer the 401(k) funds into a traditional IRA, or as of 2008, you can distribute funds directly from a 401(k) into a Roth.
You might think we’re getting a great tax break just because Uncle Sam doesn’t recognize LGBT marriage, but remember that we’re missing out on spousal IRA contributions. Straight couples are allowed to contribute $5,000 to the stay-at-home parent’s IRA (Roth or traditional). Susan is missing out on $25,000 in additions to her IRA, which could grow to over $171,000, by the time she retires (assuming 25 years at 8%). LGBT parents — unmarried persons in the eyes of the law — can only contribute to an IRA if they have earned income.
Numbers in this examples are for tax year 2008.
Image credit: Futurowoman at Flickr.
By day, Helen engineers new materials to make computer chips cheaper, better, and faster. When the son goes down (pun intended), she writes about personal finance at Affine Financial Services.