Tax strategies for a travel year of no income
June 25, 2014 4:32 AM   Subscribe

My spouse and I are going to leave our jobs at the end of the year and travel internationally throughout 2015, with no income. Are there any strategies we should be following to make the most, tax-wise, of this change?

We make $150K/yr together, currently live in Massachusetts (but could switch our state of residence in 2015), rent, have no children, and have filed jointly in the past with the standard deduction. We are schooled-up and would not be paying additional tuition. There is no income that we can defer (e.g., no year-end bonuses) and no medical procedure we would opt for that would would increase 2014's deductions.

We have been contributing 20% to our 401(k) accounts but just changed that to 5% to build up cash for travel.

An example strategy: We return our 401(k) contributions to 20% or higher but perform an early withdrawal of ~$20K next year. Although we would face a 10% penalty, the remainder would be taxed in the 10% bracket rather than in the 25% bracket that we are in now. Therefore, it seems like we would be 5% = $1K ahead, no? There could, of course, be pitfalls I'm missing.

Are there related techniques that could be employed to take advantage, tax-wise, of a planned drop in income from $150K/yr to zero over a single year?
posted by anonymous to Work & Money (5 answers total) 2 users marked this as a favorite
I think the money involved here is significant enough that it would be worth talking to a paid financial advisor about this, honestly.
posted by empath at 4:44 AM on June 25, 2014 [5 favorites]

Yes, since you can afford it, some exploration with a professional is probably in order.

If this helps: I've had the insane good fortune to have received some early inheritance over the past couple of years; tuition/living expenses paid from one modest trust, and lump "gift" disbursements from another. I used these monies -- in combination with savings -- to quit my job in pursuit of an associate's degree and to poke around at starting a business. Because the gift amounts fell just under a certain limit ($50k-ish, annually), and because of the source of the payouts (principle vs. interest from the trusts), none of this was considered "taxable income" by the tax authorities.

My state offers a seriously awesome "renter's credit," and the IRS recognizes certain educational expenses. I've actually paid zero tax, yet "made" money back, in 2012 and 2013; It's essentially like being a Deranged Thousandaire member of the 1%, kinda. I had to undergo a mini-audit from my state, the first year, as this arrangement needed some explaining, but have otherwise had no problems (yet). Obviously, these are the sorts of things you might be able to enjoy for 2015, not this year. I just mention all this as a heads-up that you might be able to factor some future minor windfalls into your "coming out ahead" assessments.

Or not. Only a licensed/trained pro can say for sure.
posted by credible hulk at 5:36 AM on June 25, 2014

Do you have money invested outside of retirement accounts? Because the most obvious benefit to taking a year off is to realize any capital gains on those investments. With your current income, you would pay 15% tax on capital gains when you sold investments outside of a retirement account. However, anyone whose income falls in the 10% or 15% tax bracket instead pays 0% tax on capital gains.

If you only have your 401(k) to worry about, this year would be a good time to convert that money into a rollover IRA which you can then convert into a Roth IRA. The advantage here is that with a 401(k) or traditional IRA you'll pay income tax on distributions when you retire, but if you convert that money into a Roth IRA, you'll pay income tax on that money now and then never pay tax on it again.

The advantages of these two strategies are contingent on how much money you're working with, and you should run the different scenarios through tax software and/or pay a tax professional before committing.
posted by Durin's Bane at 5:52 AM on June 25, 2014 [1 favorite]

Don't forget the ACA tax, um er penalty. Unless you plan to purchase a healthcare plan. Also if you do, your costs/benefits will be different than an employer provided plan, so you may also need to budget for higher out of pocket expenses should you stub a toe climbing the pyramids.

As far as converting to a Roth, you don't have to do a total roll over. You can only convert as much as the lowest tax bracket, or as much as you feel comfortable paying taxes on next year.
posted by Gungho at 7:57 AM on June 25, 2014

I would suggest adding this question in the forums at There are some serious tax ninjas over there.
posted by medusa at 2:02 PM on June 25, 2014 [1 favorite]

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