Author Topic: Tax bracket question  (Read 3897 times)

Returnoftheyeti

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Tax bracket question
« on: April 23, 2015, 09:38:24 PM »
So if I make 115k a year, and I have the option of a 401k AND a 457b.

Is it to my advantage to put 16% into the 401k and 10% into the 457b, dropping my taxable income to 85k, and the I will pay a lower tax rate. 

seattlecyclone

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Re: Tax bracket question
« Reply #1 on: April 23, 2015, 09:52:39 PM »
Yes, this probably will be to your advantage if your goal is to save money as quickly as possible to enable an early retirement. The law allows you to contribute $18k to each of these. The 457(b) can be especially nice because there is no 10% early withdrawal penalty like with a 401(k) or 403(b) account. This means you might be able to avoid needing to perform maneuvers like the Roth conversion pipeline to access your funds during retirement in a tax-efficient manner.

hoppy08520

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Re: Tax bracket question
« Reply #2 on: April 24, 2015, 06:33:12 AM »
It's good to think about tax brackets, but when I look at your situation, I don't really seen any either/or decisions that hinge on tax brackets.

If you can, you should max both accounts, period. Where tax-bracket decisions come in to play is if you have two alternates, and each has a bearing on your marginal tax rate. For example, if you have a choice between a deductible traditional pre-tax 401(k) and a Roth 401(k). If you're straddling the line of the 25% and 15% tax brackets, then that's a classic case of where tax bracket analysis can help. For someone in that scenario, supposing you are inclined to make Roth contributions, you might want still want to contribute enough to the traditional 401(k) until you get to the top of the 15% bracket, and then go Roth 401(k) for the balance.

In your situation, you will probably wind up squarely in the 25% bracket. And the difference between the 28% and 25% bracket is not that meaningful anyway since they are so close to each other.

Starting with your $115K salary, once you reduce that by the standard deduction ($6,300) and personal exemption ($4,000) and we'll estimate $2,000 for health insurance premiums you pay, then you're starting out at around $102,700 adjusted gross income. You're still in the 28% tax bracket, and need to lower your taxable income down to $90,750 (for tax year 2015) to get into the 25% bracket.  So, I would just contribute as much as you can to deductible 401(k) and 457(b).....which is what you should do anyway.

If you can max them both, then great. If you can't max both, then the question is which one do you prioritize?

If you have a governmental 457(b) then there are a lot of advantages to that. If it's a private sector 457(b), there are some risks and negatives to this that you should read more about.

The only other thing to throw into the mix is an IRA. You make too much to be able to deduct contributions to a traditional IRA, so no point in making traditional IRA contributions when you can't deduct them. You are under the income limit to make Roth IRA contributions. If you can max all three, then go for it. But if you can't max all three, it's debatable whether you should contribute to a Roth IRA, when you're in the 25% tax bracket, if you can still make deductible contributions to a 401(k) and 457(b). I would choose the deduction over the Roth IRA.

But if you're a good mustachian, you'll scrimp and save enough to max all three :-)

Oh, and if you have an HSA, you'll max that too, right?
« Last Edit: April 24, 2015, 06:35:38 AM by hoppy08520 »

thd7t

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Re: Tax bracket question
« Reply #3 on: April 24, 2015, 09:04:39 AM »
So if I make 115k a year, and I have the option of a 401k AND a 457b.

Is it to my advantage to put 16% into the 401k and 10% into the 457b, dropping my taxable income to 85k, and the I will pay a lower tax rate.
Assuming that you file single, you'll have eliminated the 28% portion from the top 30k of your bracket.  The progressive system means that you were never having all of your income taxed at that rate, though.

However, this would definitely be to your advantage.

Returnoftheyeti

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Re: Tax bracket question
« Reply #4 on: April 24, 2015, 02:56:04 PM »
So contributing32k  to the 401k and 457b does not drop me into the 25% Tax bracket, I stay in the 28%? Is that how it works?

FSA... We get 1k a year.  I currently spend about 0 on health related stuff.....  I dont want to "Buy because I have it" like my SO does.  How can I spend 1k a year on FSA stuff?  What counts ?  My contacts are about $200 a year.  Then what?

thd7t

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Re: Tax bracket question
« Reply #5 on: April 24, 2015, 03:03:01 PM »
You are never really in a whole tax bracket.  Dropping the $32k will get your money out of that bracket, but that was the only money being taxed at 28%.  Yes, you won't have anything taxed at that rate and then, after the standard deduction, even less of your income will be at 25%, but the brackets are progressive, so some of your money is only taxed at 10% (the first $9k), some at 15% (the next 28k), some at 25% (the next 52k), no matter what.

Regarding FSA, sunscreen and bandaids?  I don't really have a great answer on that.

Sorry for the slightly weird explanation on tax brackets.  The main thing is that most of your money is taxed at a lower rate, even at your full earning capacity.  Nonetheless, your plan to contribute is a good one.

MDM

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Re: Tax bracket question
« Reply #6 on: April 24, 2015, 03:45:08 PM »
In a picture:


Returnoftheyeti

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Re: Tax bracket question
« Reply #7 on: April 26, 2015, 07:23:50 PM »
Thank you