Optimizing Early Retirement for Couples on Different Timelines

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If you’re on a different FI timeline than your partner, what do you need to keep in mind—particularly when it comes to your tax status? Are there any loopholes to be aware of? Reminder: We are not certified financial professionals, and this is not financial advice—please work with a CFP and CPA.

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Mentioned in the Episode

• Married Filing Separately (IRS.gov)

• TaxAct Calculator for tax liability estimates

• The Money with Katie Show episode: How to Pay $0 in Early Retirement

• Pros and Cons of Married Filing Separately (Empower.com)

• Community Property States (Investopedia)

• Money with Katie Instagram video on Guardian Dental

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Katie:

Welcome back Rich People to the Rich Girl Roundup weekly discussion of the Money with Katie Show. I’m your host Katie, and every Monday Henah and I dig into an interesting money question topic discussion that we get from you, our listeners. So before we do that, here is a quick message from our sponsors.

Before we get into it, this week’s upcoming main episode is an interview with Grace Blakeley, the author of Vulture Capitalism. We are going to talk about, oh my gosh, so many things: what we get wrong about capitalism, private wealth ownership, what might be a better, more balanced system and overall kind of the big misconception that Blakeley sees with how we conceive of the free markets as being in juxtaposition with the quote state or with the government. And she says that this is kind of a naive conception of capitalism at least as it exists in America. So really excited about that one. And okay, onto the roundup. Henah, what are we talking about today?

Henah:

So this week’s question came from Liz and it’s one we’ve heard a lot over the years. So their question was, “I’m looking to retire early while my husband who is four years younger than me and intend to work a few years longer and the analysis I’ve done it seems I wouldn’t be able to take advantage of the many early retirement tax advantages such as Roth IRA conversions if I stop working and we are still married even if we’re filing separately. I’ve been working longer and saving diligently for years. I would really like to take advantage of this, spend more time at home with my kids before they go off to school and my husband is younger and wasn’t able to save as much early in his career and he loves his job and would love to work a few years beyond me. Are you aware of any strategies for this and would it make sense to get a divorce for tax purposes?!”

So I feel like there’s two questions here. One is around hitting FI on different timelines, which is a super common question that we get and the other is about tax strategies while you’re drawing down on your funds. And so to that, I’ll start with we’re not certified financial professionals, this is not financial advice. Please do own due diligence with a CPA or a CFP.

Katie:

That disclaimer’s going to do a lot of heavy lifting and this one I can already tell that is a load-bearing disclaimer. Should she get a divorce for tax purposes? What do we think? I would say, let me state this up upfront. I will never recommend getting a divorce for tax purposes. That is just so bleak. But I appreciate you did get married for tax purposes. It’s true. I appreciate the willingness to the number of hoops that you are willing to jump through for tax avoidance is truly an inspiration.

Alright, so based on the way this question is written, I assume that this means you have completely separate finances. So for example, you are paying for your half of your life, he pays for his half and you both are saving and investing completely separately such that the challenge then becomes, okay, well now his income is going to theoretically impact my tax rates even though his income is not impacting my lifestyle. Henah, is that your read?

Henah:

Yes. However, I actually think to your point, it is going to affect your lifestyle regardless because your finances are legally joint as I have learned in our many Rich Girl Roundtables on this. And I think there’s also a disconnect between your single person FIRE milestone and then your goals within a couple. So I think there’s some other larger questions to be asking if you do plan to retire early a couple years before your partner does.

Katie:

Interesting. So say more about that.

Henah:

I think that there’s the question of do you think that they’re going to be resentful in any way when they’re coming back from work and you’re just chilling on the couch and you’ve been there all day or?

Katie:

Oh Henah said, I know you’re asking for a financial advice but I’m going to play Dr. Phil, are you worried about resentment in your relationship?

Henah:

You got to know, because I’ve actually read case studies of people being like, I thought I was cool with it and then I realized how upset I was that I still had to keep working. And so I do think it’s something to think about.

And the other piece is how strongly do they feel about the fact that they need to continue if they like their job and the key, it seems like this husband partner does that they want to keep working, that’s great, but also I’ve read folks say, I really wanted to hit FI on my own. I don’t want someone else to subsidize my life for me. But do they feel a certain type of way if they have to live off of your investments or their own and vice versa as you’re like it seems like you could kind of live off of one of your incomes in this four year period? So it’s kind of like you got to think about those too.

Katie:

Okay, so I see what you’re saying. I think that part of what I was going to call out is depending on the extent of the separation of finances or how independently you’re both earning, saving and investing…

I do want to talk a little bit more about the tax statuses of it all because that is technically specifically what the person had brought up is like, well I can’t use this tax status, but one thing that I do want to call out explicitly and double down a little bit on, Henah, what you just mentioned, is if you don’t have completely separate finances or maybe you do but you’re willing to combine them in order to pull this off and he is still working, is his income high enough that you could both live off of it while he works and you are FI such that your investments continue to just compound unused in the background such that later when he wants to retire too, he can also live off your investment income too.

So for people who have combined finances who do not want to retire on identical timelines, my guess or my assumption is that this is typically how people will approach it. That if one person keeps working they just are using that income for their lifestyle and maybe bridging a gap with some investments, but then when they both transition fully to being retired, then they are fully living off the investments. So I think that that would be like is there openness to that type of arrangement that may work? And I think if there isn’t and we are trying to keep everything completely separate earnings savings and investment wise, then I think we have the conversation about tax loopholes or tax status changes. What say you Henah?

Henah:

That’s what I’m saying is I think then people have to reckon with the fact that some people might say no, I want us to be separately saving and I’m not using all of my income to support your life or vice versa; once I retire I don’t want you to touch the money that I’ve been saving for 40 years because we’ve only been together for five or whatever it is. I think that people have very specific preferences for their money and so I do think when you guys are on a little bit of a disjointed timeline or uneven timeline, it’s something that you want to take into consideration and have that conversation about.

And there are some stories I read, I went through a lot of rabbit holes today where people were like, I was able to retire my wife so she could be a stay-at-home parent. Now of course that’s not FI…

Katie:

That is so MLM coded.

Henah:

I know, but it’s not FI; there’s, it’s still a full-time job but it is something that they were able to make work for their home and then they join them in a full retirement a couple years later. So it’s just these are other considerations you got to think about. But if you are asking about tax status, this is where I defer to you, your girl don’t know anything about married filing separately, but I have some things that you need to think about if that is something you want to explore.

Katie:

And this girl barely knows anything about married filing separately. So like I said, load bearing disclaimer, CPAs in the audience fact check away; we will totally issue a retraction if I’m off base here.

But I did independently try to piece this together for you to figure it out. And so in the question Liz says, it seems I wouldn’t be able to take advantage of many of the early retirement tax advantages such as Roth IRA conversion ladders if I stopped working and were still married, even filing separately. So when I first read that I was like, is that true? There is one reason why Liz might be saying this that I’m going to get to in a little bit that she might have already looked into this, but because she asked and because question is somewhat common, I wanted to talk about it, why that part jumped out at me.

It is my understanding that if you are filing separately, your spouse’s income from work and your income from your investments, your retirement distributions are treated and taxed separately though for a third time, I’ll say CPAs in the audience fact check me, I’m going to get through a couple of the differences or watch outs.

But in general I think that it does treat those things separately and that is the reason that people would file separately. So to double check my assumption, I went to the Tax Act calculator. We can link it in the show notes if you want to play around with it. And I selected married for my marital status and no, when it asked if I wanted to file jointly, so it was generating an estimate for a married filing separately person, it only asked me for my incomes, not my spouses. Again, I’m going to talk about a reason why that watch out might matter. And then I entered $13,850 for my taxable IRA withdrawals to simulate a Roth conversion that is like standard deduction sized as we have talked about many times in our early retirement strategy and the Roth conversion ladder that she’s referencing in her question. And then I just put in $50,000 of long-term capital gains income to simulate roughly the upper limit of the 0% capital gains tax bracket for singles and married filing separately. And the total estimated federal tax bill on $63,850 of this investment income was $806. So all that to say, I think that filing separately is the answer here potentially if you want to create that net zero tax bill for yourself and enact all those fun FI loopholes, but you would just be using the single numbers from all of the examples and from our how-tos instead of the married filing jointly numbers.

So Henah, I know you had some watch outs. I have two watch outs that, or maybe three that I would call out that might make this no dice.

Henah:

So the first thing was around social security. So obviously anybody who plans to retire early, it’s going to impact their social security benefits until they become of age. But I feel like you had a call out about receiving and taking the benefits as you become of age.

Katie:

Yes. So a couple of things that we found in poking around here trying to figure out why this might not work. Obviously this is in reference to retiring early and if you’re retiring early, my assumption is that you are not withdrawing or you’re not receiving social security benefits yet by definition. But even if you are retired and filing separately, your social security benefits still be taxed. So if one spouse is continuing to work and earn income and the other is not, it is my understanding that filing separately is not like a workaround that will allow you to not tax your social security benefits. Having a spouse that has income will impact the way social security benefits are treated. So that would be one watch out though it does not sound applicable to this specific situation.

Another watch out is just how will filing separately change his overall tax burden? I assume his overall tax liability right now is probably lower because you guys are filing jointly. So I don’t know. I think that this just might be something to run the numbers for ahead of time, particularly if all of your income and all of your financial planning is done separately. Now just maybe looking at, okay, what is his take home pay in our current situation? And if we were to do this separately and we were to file separately, how would that change his take home pay? Because that might be a consideration that you all need to kind of work out between yourselves if you guys are going to do this so that you can have a net zero tax bill on your investments, but that he’s now going to have less income because of it. So that occurred to me.

But then finally, the big thing that might again be the reason why Liz is like, yeah, it’s not going to work in community property states, you have to report half of the income that both spouses earned on your return. So that might throw a wrench in Liz’s plans if she’s having to report half of his earned income on her return anyway. As a reminder, community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. So if you live in one of those places, this would I think kind of be a non-starter as far as a tax loophole.

But as far as I can tell from reading the definitions and instructions and watch outs about married filing separately and then plugging it all into the Tax Act calculator, community property state aside, I think this should be an option. And again, if it’s not, I think I would come back to that broader lifestyle question of just even if your investments, or even if your financial plans are currently separate, if this is something you both feel strongly about, like you retiring and him continuing to work, is there an option to make that switch now and kind of start thinking about things combined that way you can live off his income for a few years and then you can both live off all of the investments together.

Henah:

Yeah, I also wanted to point out a couple other just watch outs that I had noticed. So one is that both spouses must take deductions the same way. So if one spouse decides to itemize instead of taking the standard deduction, the other spouse has to do it too.

And the last piece is just that if you’re married filing separately, there’s deductions and credits that you can’t take advantage of. So there’s the child independent care expenses credit, the earned income credit adoption, credit education credits, and your student loan interest adoption. And you can’t claim any of those or receive the credit for any of those if you do decide to do that. So that’s another piece of the puzzle that you have to consider, but I just want to make sure we’re giving the most comprehensive picture of if this is an option for you.

Katie:

Good call. So if someone’s listening to this and they’re not sure, I think you have a couple options. The easiest or most straightforward approach would just be to work with a CPA and explain your strategy to them and basically be told, is this going to work or not? Here’s what I want to do. Obviously that costs money. So that’s one consideration.

Something else, if you’re just trying to do the back of the napkin comparison, I honestly think that you could probably use that Tax Act calculator, go in and pull it up on two tabs and do one scenario where you guys are married, filing jointly and fill out all the information and then pull it up in another tab and have you both fill it out as married, filing separately and just kind of compare the outcomes and see what you get. It’s probably the easiest way to approach it, but when it comes to the community property considerations, it does not appear as though your location is an input in this calculator. So I still think that the community property consideration might require more professional help to work through, but theoretically I am tentatively optimistic that there is a path forward here…

Henah:

Just imagining all the emails flooding in from CPAs that are like, actually!

Katie:

Yeah, this is so wrong.

Henah:

Which again, we’ll issue an update if we are wrong.

Katie:

Yeah, I’m like, so maybe listen to this and then before you make any changes given a week so that next week we can tell you we were completely wrong.

Henah:

If it’s not that urgent, maybe wait it out.

Katie:

You’ll have seven days to do your own due deal and then come back and we’ll be like, actually, yeah, the CPAs told us we were totally off base.

Henah:

Wait. It’s two weeks, we have a bi-week in between.

Katie:

Ah, okay. It’ll take two weeks, weeks for you to get the, fortunately there are plenty of CPAs that listen to this, and I’m sure if we’re totally off base, they will come barely up through the door to let us know.

Henah:

Okay, so I have a money story this week from Aaliyah and it’s very relevant to a money story that I have as well. So she said, I especially found your recent attempt to negotiate a healthcare bill interesting and commiserate in your frustration. So she’s referring to the Guardian Dental video that you made for Instagram several weeks back.

Katie:

I said, if you’re not Guardian Dental, keep on scrolling. If you are, this is for you.

Henah:

That was probably my favorite video in a long time. She said, “I’m a young woman doctor, and even I have issues with figuring out bills. But I think more conversations should be had on how to pick a plan from the beginning in an attempt to mitigate risk, how to read an EOB and how to push back on costs that don’t seem right. For example, did you know that a surgery can cost you a facility fee, a doctor fee, an anesthesia fee, a pathology fee of tissue is sent, et cetera? I didn’t until I had a surgery myself.”

And I recently had a 20-minute appointment at Emory. I have not hit my deductible, but I got a bill for $700 for this 20-minute appointment. And I was like, excuse me? Excuse me? And so I’ve been fighting with them back and forth, and so when I fought with the billing department the first time they said, sorry, you haven’t hit your deductible. This is the full cost. It is what it’s, so I’m sitting there, I’m like, okay, I’m just going to have to eat this cost or do a payment plan or whatever. Then I thought, maybe I’ll try one more time.

So then I tried another time and someone said, well, we could do prompt pay, so I’ll give you 20% off discount, so it’s more like $560. And I was like, again, I’m not paying. That’s unreasonable, but could you just look into this one more time? And I responded, the third person that got back to me said, oh, actually we were charging you for a facility room, not for the appointment. And so that is why you had that fee and now we’ve taken it off and your balance is $0.

Katie:

Oh shit. Oh my God. So you basically just said, you just kept going, this feels wrong. Can you check again? And the third time they were like, oh yeah, sorry.

Henah:

Yep, yep. And that happened to me when I had the infamous lump of 2023. I got all of these bills and half of them were incorrectly labeled or billed or I had a pathology fee for the biopsy, but then I also had the specimen fee for removing the tissue. I had the room fee, I had all the things, and then I had to fight with them for several months to get them to reach something more reasonable. And even then I spent a whole year paying it off.

And my brother, when he gets a bill that it’s unreasonable to him, he pays it off in $1 installments that they can’t report it because he’s paying it. They can’t send a collection, but he’s like, on principle, I’m doing this.

Katie:

Dude. I saw something once that was like, those bills are between you and God. It’s none of my business. I know. I’m slowly racking them up from UC Davis, and I’m just kind of waiting until we actually figure out what’s going on before I start paying for things because I kind of feel like in one fell swoop, I would like to be able to push back on all of it versus just taking it as I go. I don’t know. My strategy keeps evolving over time.

Henah:

I think the fact that Aaliyah is a doctor herself and also has no idea is just so telling of how forked up the system is.

Katie:

Yeah, it’s a mess. It’s interesting that you’re able to do all that over chat, too.

Henah:

Me?

Katie:

Yeah.

Henah:

Yeah. When you log into the portal, it’s like message and then you pick billing, and I just keep saying the same thing.

Katie:

That is so much easier than calling.

Henah:

They don’t have that for a portal for you?

Katie:

I don’t know. I checked. I always just kind of default to finding the phone number and calling, but I’m going to try chatting because I think that that sounds like an easier way to be annoying and persistent.

Henah:

Yeah. You go to, yours is health.ucdavis.edu, and you just make an account and you go through there. Girl, I don’t call anybody. I will message them until—

Katie:

You areuch a millennial.

Henah:

Yeah, no, my husband is scared to pick up the phone.

Katie:

So why is this a phobia that we all share? Why do millennials hate talking on the phone? I am very fascinated by people who have really intense experiences with our healthcare system and how they deal with it in the aftermath when they basically have a life-threatening or near death experience and then survive and on the other side are like, okay, now I have to face off with the insurance companies. It’s just really interesting. So I’m kind of in the process of setting something like that up for a full length episode to do a show about that.

But in the meantime, that is all for this week’s Rich Girl Roundup. CPAs, I’ll see you in my inbox and we will see you on Wednesday. The rest of you to talk about Vulture Capitalism and what we fundamentally misunderstand about it.