BootsnAll Travel Community

We need a little financial advice thread for us long term American travelers (maybe someday I’ll start one out for the English, Australian and Japanese as well).

Anyway, long term travel is never a good financial move, but Uncle Sam does provide some tax benefits for us travelers (although I am sure it was not by design). So for those American travelers who do want to make a concerted effort to balance their future retirement with their desire for long term travel you should at a minimum due the following and in the following priority:

1. Always put at least enough money into your 401k to get the company’s match.

2. Max out your contribution to either a Trad IRA or Roth. If you plan on traveling for a calendar year or having a year of otherwise little or no income then place this in the Trad IRA (if you qualify). Otherwise place it in a Roth (most people should qualify but some higher salaries, especially the married, will not)

3. During your calendar year(s) of little or no income convert your 401k and Trad IRAs over to a Roth Conversion. Work with your financial adviser to determine how much to convert each year to maximize your tax breaks and also to make sure you do it properly so as not to incur any penalties. You’ll have to pay taxes on this conversion so make sure you retain enough money in your accounts to pay these taxes while you are traveling. But remember, these taxes will be less than you would have already paid had you never placed them in a retirement account at all. So you should have the money already in your account for this!

4. If possible you should plan your trip dates such that you always earn tax free money during each calendar year. If number 3 above already applies to you this may already be covered. But for those that it doesn’t, you should seriously consider offsetting your travel dates to ensure you have some income (8-10K or so) during a calendar year. For instance, for those 1 year RTW travelers who currently have a job, it would be better to leave say May and comeback in April than to be gone from Jan 1st to Dec 31st. Any decent financial advisor can tell you how many days a year you’d need to work to get it all Federal tax free. (it’s a function of the Federal Standard Deduction plus any 401k contributions)

5. Have enough money set aside to continue to fund a Roth while you’re traveling (if you qualify, which normally requires enough earned income that year to offset your contribution). And, remember you can fund this up to April 15th of the following year so it doesn’t actually have to be while you are physically traveling.

6. If while traveling you do run out of non-retirement sources of money, you can always take out your contributions to your Roth (but not your earnings) penalty and tax free. But, this should be a last resort. Better planning would be to cut your trip shorter.

Anyway, that’s the general idea. Obviously, it’s important to work with a financial advisor to know exactly which above you qualify for. And, of course, I am also assuming you’ve already removed yourself from debt and all that other good stuff.

This is exactly what I'm planning on doing. I'm maxing out my 401k and plan to convert it when I'm traveling. I should save more than 15% on taxes.

Thanks! This is very helpful

Glad you posted this. I maxed out my 401K contribution into a traditional IRA in 2007. I was planning on switching the money to a Roth IRA when I'm traveling in 2008. It made sense to me so I'm glad to see that it makes sense to others as well.

So I don't understand this conversion of 401K into IRA and the taxes on it. My last day of work was this past Friday and soon my company will tell my Retirement company that I'm no longer a employee and after that notification I will have access to convert my 401K into a IRA.I also did some post tax saving plan with the company which I will put into a brokerage acct.

So are you guys saying I should wait till next year to do this as I will save more taxes in a year in which I will be traveling.

Can somebody recommend some reading material on this? I want more info to read.

Converting a 401k to a traditional IRA isn't going to incur any additional tax liability so it won't matter which year you are doing it. The above advice suggests converting 401k to a Roth IRA. A 401k and traditional IRA are both pre-tax money but a Roth IRA is after tax money. When converting from a 401k or traditional IRA to a Roth you have to pay income tax on all that money. By doing this in a year when you don't earn much you'll be in a lower tax bracket (best case is 0%).

Disclaimer: This is general advice given by some weirdo on the internet. Please consult a tax adviser before moving your money. As with all tax laws there are many many special cases that would require full knowledge of your finances to properly advise on.

Finally got it..spoke to the guys at Fidelity who have my last 401K rollover.

I'm good with numbers...really am but when it gets to investing I have no clue about anything..so bad so bad...but I'm learning slowly :-)

Excellent thread. Excellent advice.

Hope some is still watching this post because I've got another question. If one is converting an IRA to a Roth IRA does the entire amount of the IRA have to be converted? My scenario would be quit my job and rollover my 401k to an IRA. The next year I would have no earnings so it would be a good time to convert. But, with a large enough amount, say 100K, by converting all of this I wouldn't get the desired tax break. Can it be done is smaller chunks for multiple years?

quote:

Have enough money set aside to continue to fund a Roth while you’re traveling (if you qualify, which normally requires enough earned income that year to offset your contribution)

See, that's the thing. I've worked for small companies that don't offer 401Ks so I created my own Roth IRA. Well, I earned less than $1,000 in earned income when I traveled so my contribution is much less than the maximum. I don't see a way around that.

quote:

If one is converting an IRA to a Roth IRA does the entire amount of the IRA have to be converted?

No, you don't have to convert it all at once.

As far as taxes (for 2008), in the most simple case if you're single and take the standard deduction your Federal taxes would be:

0% - for the first $8950
10% - for the next $8025
15% - for the next $24525

After that you start getting into the 25%, 28%, etc. tax brackets and you're potential tax savings would likely start to diminish.

quote:

See, that's the thing. I've worked for small companies that don't offer 401Ks so I created my own Roth IRA. Well, I earned less than $1,000 in earned income when I traveled so my contribution is much less than the maximum. I don't see a way around that.

Well, the only way around it is to schedule your travel so that you are never without income over a calendar year. So, if you take off for 18 months, leave April 1st and come back Sep 30th the following year. That way you are likely to have income earned in both tax years. Obviously, once you start looking at trips encroaching on 2 years or longer this would no longer be possible.

Of course, the other benefit is less federal taxes. For instance, let's take two people who would ordinarily make 36K/year. Let's keep this simple and say they also don't have any retirement money to convert or capital gains. One takes off April 1st and then comes back Sep 30th the following year and goes back to work. The other works until July 1st and then takes off on their trip getting back Dec 30th next year.

The first one would essentially pay zero Federal taxes. OK, technically they'd owe $5 each year based on the tax schedule above. The second would owe around $950 in Fed taxes for the first year and nothing for the second. So, the first person ends up nearly 1000 dollars ahead just solely based on the timing of their trip.

Thanks for the response. I returned from a year off last year so I'm a couple years away from doing it again, but will keep this in mind.

BTW Halfnine - very nice picture on whygo today.

quote:

long term travel is never a good financial move,

Hmmm, I have to disagree with this line. We have been traveling for almost 2 years and we have found it to be an excellent financial move.

I know some perpetual travelers that retired in their 30's ( over 20 years ago) and also found it to be excellent financial choices for them.( Two couples who have written some fairly famous books about it and who are now friends of ours).

So I certainly would never say never in this instance.

It may not be a good financial move for some people, but for others it is the best choice in many ways..... including financially.

Like most things, much depends on how you do it ( and there are quite a few ways to do it).

quote:

Originally posted by Bunglegirl:

See, that's the thing. I've worked for small companies that don't offer 401Ks so I created my own Roth IRA. Well, I earned less than $1,000 in earned income when I traveled so my contribution is much less than the maximum. I don't see a way around that.

You can contribute to your Roth IRA up to your Earned Income.

With an Earned Income of $1000, you can only contribute $1K.

You need to find ways to increase your stated Earned Income (up to the Standard Deduction if possible.)

Did you sell anything this year? Even if you sold some old shoes on ebay, you can (and theoretically should) count that as Earned Income. Did you make some money mowing your neighbors lawn? Count it as income.

If you can increase your Earned Income for last year, you can increase your potential Roth IRA contribution. (This is only worth it, of course, if you actually have spare cash to put in your Roth IRA.)