Job Layoff and Tax Planning

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Job Layoff and Tax Planning

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Job Layoff and Tax Planning

by hulahoop » Thu Jul 04, 2013 8:55 am

I will be getting laid off from my employer later this month, and I'm thinking about what opportunities this might present. Namely, converting some more Trad. IRA into Roth.

Some back of the napkin calculations look like this.

84,500 YTD earnings including severance
-10,000 401k
----
74,000 AGI
-12,200 Std. Ded.
-19,500 personal exemptions (family of 5)
-------
43,100 Taxable income

If I were to stay unemployed for the rest of the year, it seems like I could convert 30k (up to the 72,500 breakpoint) at 15%. Then another 70k at 25%.

Thoughts?

To take this to the next logical level -- how long would I need to reside in a No-income-tax state before converting to get their state tax benefit?

Anything else that I need to be thinking about?????

hulahoop

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Re: Job Layoff and Tax Planning

by livesoft » Thu Jul 04, 2013 9:02 am

Unemployment earnings?

Do you wish to contribute the maximum to your current 401(k), if so up the contribution rate?

Will you look for a new job? If so, will the new job let you contribute to the 401(k) in 2013? Will it have better options and a better match? Will you be eligible in the first six months anyways?

Health insurance? Will paying COBRA increase Schedule A deductions?

A family of 5 only uses the standard deduction????

This information has been prepared without taking into account the Sequestration, investment objectives, financial situation and particular needs of any particular person or company.

livesoft

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Re: Job Layoff and Tax Planning

by Padlin » Thu Jul 04, 2013 11:20 am

You are 59.5 or over right? 10% penalty if not.

In Ma. you can put in for unemployment after termination, you get 50% of your weekly up to a max of somewhere around $650 a week. If you're going to collect you'll need to add it to the equation as mentioned by Livesoft.

Regards | Bob

Padlin

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Re: Job Layoff and Tax Planning

by Peter Foley » Thu Jul 04, 2013 11:33 am

A couple things. Unemployment benefits are taxable income for federal purposes. Depending on the state in which you reside, your severance pay may be deductible for unemployment purposes, i.e., it will delay your receipt of UI benefits. If that is the case in the state in which you live, I would suggest delaying to apply for UI benefits until October 1, 2013. (Benefits are calculated in most states based on wages in the first 4 of the last 5 completed quarters.) If you wait until October your benefits would be calculated based on earning from July1, 2012 through June 30, 2013. Your benefit year (the time during which you could receive benefits) would be October 1, 2013 through September 30, 2014. Having access to benefits for a full year may be important if you end up taking a part time job.

Peter Foley

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Re: Job Layoff and Tax Planning

by archbish99 » Thu Jul 04, 2013 1:30 pm

Padlin wrote:You are 59.5 or over right? 10% penalty if not.

10% penalty on what? OP didn't mention any withdrawals from retirement accounts to fund living expenses, that I saw.

That said, I would assume OP's original "anything else" does already include what he/she is going to live on for the remainder of the year. Not a spouse's salary, if you're able to move to a no-tax state just to capture the tax benefit on conversion. 

I'm not a financial advisor, I just play one on the Internet.

archbish99

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Re: Job Layoff and Tax Planning

by Watty » Thu Jul 04, 2013 2:25 pm

Anything else that I need to be thinking about?????

You will likely qualify to make a deductible IRA contribution this year for both you and a spouse if you don't find another jobs soon. That would increase the amount of retirement account contributions you could convert in the 15% tax bracket.

If you have any college age kids then the Roth conversions will likely count as income for determining financial aid so that could be a downside to doing conversions.

If you still do not have a job after the first of the year then getting health insurance through the affordable care act might be less expensive than COBRA.