In the last 6 or 8 months, for a variety of reasons, my wife and I have landed into an area where our AGI will likely be north of $220k (gross almost $300k).We both have 401(k)'s at work, with matching amounts, and we're max'ing these out. From what I can tell, this income level gets us out of the realm of IRA's (roth or otherwise), which we were both contributing into up until 2018.Outside of a generic brokerage account ... are there any tax advantaged strategies we should be using? I suppose it's a good problem, but it looks like most of our retirement / investment strategies are now all taxed.Am I missing something?
I've long favored Berkshire Hathaway (BRK) as a tax-postponing savings plan.intercst
Outside of a generic brokerage account ... are there any tax advantaged strategies we should be using? I suppose it's a good problem, but it looks like most of our retirement / investment strategies are now all taxed.Watch out for mutual funds when investing in a taxable account. Even those that are growth oriented can throw off capital gains at will causing a taxable event for you when you least expect it. Focus on ETFs, for which changing out stocks is not considered a taxable event, or individual stocks. That way the taxable event comes when you sell a holding, not at the whim of the fund manager.Great question to be asking. IP
In hindsight, I could have done a better job of growing our net worth if I had spent less time on tax dodges and more time growing my money in my taxable account in assets that simply grew in value without throwing off (much) taxable income - Berkshire Hathaway, S/P index fund, solid growth stocks, etc.
We both have 401(k)'s at work, with matching amounts, and we're max'ing these out.... Am I missing something? You don't mention your age. Consider that tax-deferring does mean you may eventually have to pay and if you do a really good job of it, you may pay more. Do look at taxation of income(dividends,etc) vs capital gains and how different investment vehicles are taxed.With the recent changes in the tax laws, you also may want to look at your returns and compare 2017, 2018 and what it looks like for 2019. Fully understanding all the moving parts - taxes and investments is important.And you have your estate documents up to date, right ?
I'm hitting some of the same issue. In addition to contributing to taxable accounts, we are continuing to make non-deductible contributions to DW's traditional IRA.Beyond the non-deductible contribution, we are also doing in service Roth conversions on some of my funds in the 401k, and rolling some of DW IRA into Roths. We aren't trying to roll everything over in Roths, because, well, we can't afford it, particularly not all at once, but I would like to get a sizable portion of our retirement savings into Roths, say 35 to 50%, before tax rates go up in a few years.Good luckDanbobtx
Strive to pay huge amounts of taxes! Monstrous amounts. Put your excess money in investments in taxable accounts. The more taxes you've paid the richer you are. It's a sign of success.Of course it also doesn't hurt to have large amounts of unrealized capital gains. The important thing to remember is that avoiding or postponing taxes shouldn't drive your investment decisions. Post-tax money is a wonderful thing.-IGU-
The "backdoor" Roth conversion might be applicable to your situation.https://investor.vanguard.com/ira/roth-conversion
As a slightly more extreme option ....If one of you became self-employed (contracting back to your current employer as well as others?) there is a very real possibility that you could shelter more of your income. If contracting is a possibility, you need to read IRS publications 334, 535, and 560 and then plan to spend a couple of hours discussing all the questions from your reading with a good tax accountant. And then do some more studying.You would also need to become proficient with your federal income taxes overall so that you understand how various decisions might affect those taxes.Kathleen
Keep in mind paying taxes at capital gains rates may be the best you can do.Also consider tax free bonds where appropriate.
In hindsight, I could have done a better job of growing our net worth if I had spent less time on tax dodges and more time growing my money in my taxable account in assets that simply grew in value without throwing off (much) taxable incomeiampops, I frequently see posts around the boards from Fools who are looking for ways to game the system, either for tax purposes or market timing, convinced they had found a way to profit that no one else had before. In almost all of the cases, I've felt that if they had just focused on quality long term buy-and-hold investmenting, they would have achieved as good if not better returns over time and without the stress or energy expended. But looking for shortcuts is human nature, and learning from life lessons is a part of growing up that continues no matter the age. That's why I like The Motley Fool Community so much - there is a wealth of experience from Fools of every generation and life stage from which to learn.FuskieWho is known as a prolific poster on the boards but has always felt he has gained more from reading than the questionable advice he has offered...-----Ticker Guide for The Walt Disney Company (DIS), Intuit (INTU), Live Nation (LYV), CME Group (CME) and MongoDB (MDB), Trip Advisor (TRIP)Disclaimer: This post is non-professional and should not be construed as direct, individual or accurate adviceDisclosure: May own shares of some, many or all of the companies mentioned in this post (tinyurl.com/FuskieDisclosure)Fool Code of Conduct: https://www.fool.com/legal/the-motley-fools-rules.aspx#Condu...
Currently 38 ... wife is 40. Estate documents are up to date.
I've been self-employed for the better part of 20 years, only in the last 5 years have I also drawn down a W-2. Wife has always "worked for someone else".Also have another business (C-Corp) which I own with a partner that throws off some cash.
I've been self-employed for the better part of 20 years, only in the last 5 years have I also drawn down a W-2.Being self-employed, when you say that you are 'maxing out' your 401(k), does that mean that for your 401(k) in 2018 that you are putting in up to the total limit (employer and employee sides) of $55,000, or are you just maxing out the employee deferral limit of $18,500? Here's a calculator to help you figure out how much you can put in as the employer, if you're not already doing so: https://scs.fidelity.com/products/mobile/sepMobile.shtmlAJ
The problems you have are nice ones. I have tried the Robot type portfolio management and a professional advisor. Both were OK for a short term (2 years and 4 years respectively). By OK they actually had higher returns than a very simple 1 mutual fund investment - Vanguard Wellington.You can easily do worse than VWENX, but there are very simple ways to beat the vast majority of managed funds and fund advisors. Buy a good S&P500 index (VFIAX for example) and enough cash to cover major expenses and deal a situation where one of you looses income as the market tanks -- i.e. at a time you do not want to be selling stuff.Such an approach is not without issues. The biggest one I see for you is the roughly 2.5% cash dividend from an S&P500 fund. That is taxable. It is easy to get greater returns than such a fund, but almost always that higher return comes with more income tax and/or more risk.Since you have a high income, you probably should spend some time looking at the tax efficiency of any funds you get. (Hint - bonds are not tax efficient, but their purpose in my view is not for income - they are to CYA in times like September 2008 through April 2009.)Morningstar is an excellent place to research options. This link shows one fund I mentioned and shows both pretax and post tax returns. http://tinyurl.com/ybyyfyem
Since you have a high income, you probably should spend some time looking at the tax efficiency of any funds you get. (Hint - bonds are not tax efficient, but their purpose in my view is not for income - they are to CYA in times like September 2008 through April 2009.)Will they really CYA of the people? Do you really believe they will have the foresight to jump out of the market into bonds in late August 2008 and then have the COURAGE to jump back into Equities in early May 2009? Timing the market is difficult--Especially when one is afraid of it. Most people are afraid when the market is in a prolonged decline. If they got out in time they wait too long to get back in and give it all back.It is very easy to look back in time and cherry pick the declines to avoid and when one should have jumped back in... Try doing that in real time with real money and not fantasy trading--and see how easy that is and how much money you made.Good luckb&w
Money in Roth and Taxable accounts will be lower taxes down the road for you. On a traditional IRA all the money you pull out is taxable as ordinary income. All of it unless you made some non-deductible contributions.Taxable accounts, assuming you LTBH is only taxable as capital gains, and only on the gains. So if you put in $1 and have $1 of earnings pulling out $2 will only count as $1 of income.And as long as your income is below 77K for married joint filers that rate is 0. Above that is only 15% for quite a while (until 479K).So if your portfolio is half gain and half contribution you can pull out 154K with 0 tax assuming that's your only source of income.That's likely better than your 401K.Don't be afraid of post tax investing. Just buy tax efficient investments like a total market index fund or BRK.
With a C-corp, might also want to look into having your accountant set up HRA's for the employees. Maybe an employee education assistance program if you or your partner are wanting to continue your education.Kathleen
B&W wrote Will they really CYA of the people? Do you really believe they will have the foresight to jump out of the market . . . .In my view nobody has the skill and foresight to consistently jump in and out of the market. A few folks occasionally to guess correctly. My suggestion was have cash or MM funds so one can hold the course for events like Sept 2008 through April 2009. My general view is 5% of a portfolio.I firmly believe in my two investment ideas:#1 Stay The Course#2 The Buy High, Sell Low approach has too many problems.I can only speak for myself, but it was clear to me when Congress voted against TARP in Sept 2008 and the market tanked, things were bad and going to get worse even though Congress corrected their screwup. And I do not personally know anybody who predicted March 9, 2009 was the bottom - although Mark Haines did say that on CNBC. Myself in late April or early May on 2009 I thought is possible the worst was over.
You should look into moving to a high deductible health plan at your work that allows you to open an HSA. This is really the best retirement account out there as it has characteristics of both a Tradition IRA (contributions are pre-tax) and a Roth (withdrawals are not taxed as long as they are used for qualified medical expenses). If you have the means to pay your medical deductibles out of pocket (and it sounds like you do), you can just treat your HSA as another tax-advantaged retirement account.
I don't suggest what anyone should do--I can only tell you how I run my portfolio and the results I had using real money--Not somebody that makes a living from writing a book and getting people to invest their money because they themselves are afraid to invest their own money---My portfolio BOTTOMED on March 6, 2009. I was mostly fully invested and living off my portfolio income because I was retired and had no pension--no annuity-- and no one that was going to leave me an inheritance I only had minimal SS benefits. By the end of March 2009 my portfolio had rebounded about 50% above March 6, levelBy the end of April my portfolio had about tripled the March 6 level-- The income was undisturbed in that timeframe---and actually had still been rising---And even more important the income level was above my needs for all my expenses that were necessary-discretionary-taxes and gifts to family. The portfolio recovered shortly thereafter and today has been increased manifold since March 2009However , if you ask me, what will the market do in the future-I will tell you I DON'T KNOW and neither does anyone else.b&w
Am I missing something?You can still invest in IRAs, you just don't get the tax deduction. But you can still take advantage of the tax deferral aspect, i.e. tax free growth, of investing inside of one. FWIW, once I got established in private practice, I didn't qualify either, but I still saved inside of one.Don't know what your health insurance situation is, but if you can save/invest in an HSA, go for it. It can be a way to set aside another $7000/yr to grow tax deferred.Then it is pretty much a taxable brokerage account. On a tangent, do you have 3-6 months of living expenses set aside in cash? Some people get ahead of themselves about investing but forget to plan for accidents/layoffs/emergencies etc. The reason for 3-6 months, also the time frames when disability insurances usually start kicking in. Do you have disability insurance?JLC
You can still invest in IRAs, you just don't get the tax deduction. But you can still take advantage of the tax deferral aspect, i.e. tax free growth, of investing inside of one.Why would you do this? You'll eventually end up paying income taxes on your "tax free" growth instead of lower capital gains tax in regular investment accounts?
Why would you do this?Again, tax deferred growth. Personally, I may or may not need the monies. Most likely not. Come time for forced RMD, do a direct charitable donation. Get the write off and no taxes paid, neither as income nor capital gains.JLC
Taxes are always deferred until you sell it.Unless you re-investing dividends, I don't see how you are really deferring anything. If the portfolio or your regular income is large, then maybe the incremental taxes on the dividends over the years might be high, but all that growth will be taxable at income tax rates rather than capital gains rates in when pulled from an IRA.If you just did the charitable donations as you go, you would get the tax reduction anyway on the way.Doesn't make sense to me but I guess if it meets your goals, have at it.
Taxes are always deferred until you sell it.Unless you re-investing dividends....DING DING DING DING, we have a winner.You can easily do the math. Say my $100 earns 5%/yr. In an IRA, at the end of the year I have $105. Regular account, I have $104 assuming the dividend is qualified. Reinvest, rinse, repeat for 20 years and you can see which has the bigger pile of money at the end. Even being overly simplistic, IRA has $200 while the non-IRA has $180.Now I start donating. With the IRA, I'm giving away $200. With the non-IRA, assuming a 20% cap gains, I'm now down to roughly $144. So I'm able to give almost 40% more. Why give Uncle Sam the extra?For me personally, I probably won't need the money, so this is how I view a non-deductible IRA playing out. However, even if I did need the money, I might be able to arrange my finances where my income tax is still lower than capital gains.JLC
With the non-IRA, assuming a 20% cap gains, I'm now down to roughly $144.No. Your cost basis would grow in excess of your account value, since you are taking taxes out.To use your example*, at the end of year one, your account value would be $104 but your cost basis would be $105. At the end of 20 years, your cost basis would be $200 with an account value of $180. When you sell, you would get to write off a $20 LTCL against your income - essentially allowing you to donate that extra $20.*Hard to use this example and include a tax withdrawal. I might be able to arrange my finances where my income tax is still lower than capital gains.How? LTCG are taxed at 0% on taxable income up to $37,800 for an individual. How can you get your income into a tax bracket better than 0%?
"Even being overly simplistic, IRA has $200 while the non-IRA has $180."But your strategy was using money that had already been taxed and investing it in an instrument that will require it to be taxed again.The IRA owes taxes on the $200 but the non-IRA paid them on the way (on those incremental investments).Capital gains on the total is paid at CG rates for the non-IRA but regular income rates for the IRA.And over the long haul, tax rates and rules don't remain static.I still don't get why one would deliberately over-contribute to an IRA. No deduction at the time but taxable later.Obviously just giving it away from the IRA does remove the second taxation, but it still doesn't make sense to me as a strategy.
I still don't get why one would deliberately over-contribute to an IRA. No deduction at the time but taxable later.Oh, it's even worse than you think.When you withdraw from an IRA that has both pre-tax and post-tax contributions, it is taxed in the ratio of the pre- and post-taxed contributions. And that ratio stands forever, until the IRA balance drops to zero. The only way you don't get hit is if you have made NO tax-deferred contributions to your IRAs.Look up "pro-rate rule".
rayvt writes,When you withdraw from an IRA that has both pre-tax and post-tax contributions, it is taxed in the ratio of the pre- and post-taxed contributions. And that ratio stands forever, until the IRA balance drops to zero. The only way you don't get hit is if you have made NO tax-deferred contributions to your IRAs.</snip>How are you being "hit"?The ratio you describe just limits the amount of tax paid contributions you can withdraw from the IRA each year (e.g., if you withdraw 10% of the IRA balance, you can only withdraw 10% of the tax-paid funds as part of the withdrawal. The IRS just won't let you withdraw the tax-paid money first for a few years, pay no tax, and then start on the "taxable" funds afterwards.)But you're not paying any additional tax as a result.intercst
You paid the income tax on 100% of the money you put in, when you put it in. But when you take it out, you only get to skip the tax on a portion of the money you take out. In essence, the tax-free withdrawals are spread out over the rest of your lifetime, a bit at a time. Until your IRA (that is the total of all your IRA accounts) gets down to zero.Not even just your own lifetime, though. If you heir inherits your IRA, the pro-rata rule continues to apply to the inherited IRA.I'm not sure if you are paying additional tax or not. But it is certainly the case that the tax you save on the withdrawals is spread out pretty thin.if you withdraw 10% of the IRA balance, you can only withdraw 10% of the tax-paid funds as part of the withdrawal. No, this is wrong. I think (hope) you know the right pro-rata rule but just mis-stated it.The portion that is tax-free is total of your after-tax contributions divided by total balance of the IRA(s). It's not the percentage of the withdrawal to the IRA balance.If you made a one-time after-tax contribution of $5000 and your current IRA balance is $100,000, then only 5% (5000/100,000) of the withdrawal is tax-free. If you withdraw $4000 (4%) then only $200 of it is tax-free.The next year, the ratio is 4.8% (4800/100,000) assuming the IRA balance grew back to $100K.Each year, a smaller and smaller portion of the withdrawal is tax-free.
Rayvt writes,If you made a one-time after-tax contribution of $5000 and your current IRA balance is $100,000, then only 5% (5000/100,000) of the withdrawal is tax-free. If you withdraw $4000 (4%) then only $200 of it is tax-free.</snip>The percent is the same. (e.g., $5,000 in after-tax contributions on a $100,000 IRA balance is 5%, and $200 after-tax in a $4,000 IRA annual withdrawal is 5%) I'm just stating it differently.Actually Turbo Tax handles the arithmetic for you. When I was making SEPP distributions up until age 59-1/2, a small portion of my IRA was "after-tax", so about 1/2 of 1% of the annual withdrawal wasn't taxed.(Historical note: There was a couple of years during the Reagan Admin when capital gains and ordinary income was taxed at the same rate. I made additional after-tax contributions to my Exxon 401k while that was in effect. But once they brought back the lower rate on capital gains, it made more sense to save in a taxable account rather than make an after-tax contribution to an IRA/401k.)intercst
You can still invest in IRAs, you just don't get the tax deduction. But you can still take advantage of the tax deferral aspect, i.e. tax free growth, of investing inside of one.Why would you do this? You'll eventually end up paying income taxes on your "tax free" growth instead of lower capital gains tax in regular investment accounts? I assume the original response was referring to a 'backdoor' Roth IRA. If so, there would be no income tax on the earnings/growth.
I assume the original response was referring to a 'backdoor' Roth IRA. If so, there would be no income tax on the earnings/growth.There was no mention of the "backdoor" Roth IRA by the person. The post had the appearance that non-deductible contributions were good even without using the backdoor provisions.PSU
I assume the original response was referring to a 'backdoor' Roth IRA. If so, there would be no income tax on the earnings/growth.If it was in reference to a 'backdoor' Roth IRA, then why would part of the original quote say But you can still take advantage of the tax deferral aspect, i.e. tax free growth, of investing inside of one.?"Tax-free growth" is referring to traditional IRAs. "Tax-free withdrawals (if the tax laws don't change)" would be referring to Roth IRAs.AJ
Never commingle pre and post tax accounts!!!
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