Author Topic: I'm suddenly a HCE, want to minimize taxes  (Read 1739 times)

zolotiyeruki

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I'm suddenly a HCE, want to minimize taxes
« on: February 24, 2021, 01:23:00 PM »
I work for a startup, was the first employee, and have a small equity stake.  The company is profitable, and growing rapidly.  Last year's profit sharing pushed me solidly into the 22% bracket, and this year's is expected to push me WAY into the 22% bracket.  This is wholly uncharted territory for me.    I anticipate that I will have about $60k more pre-tax to invest this year than last year.  Gosh, that feels so surreal to type.  Up to now, I've been able to optimize my way back into the 12% bracket, but that's clearly not going to happen this year.  I mean, I'm thrilled to be making more money, but at the same time not thrilled about paying a higher tax rate.

I've done some planning, and here's a description of how things stand:
--Filing MFJ, six kids (5 eligible for child tax credit in 2021)
--Just turned 40, original plan is to retire at 51 (coincident with the last child leaving the house), but on track to be FI well before then.
--I plan to max out my 401k this year
--I won't be able to deduct traditional IRA contributions ( MAGI over $125k)
--I'll be able to contribute to a Roth IRA (MAGI under $206k)
--I do not have access to an HSA
--We have no plans to fund our children's college education
--Our only debt is our mortgage
--There are no plans or desires to inflate our lifestyle--it already feels lavish.

A Mega Backdoor Roth is enticing, but I don't know that I can take advantage of it, because 1) I don't know if our retirement plan allows it (but I'll ask), and 2) it's a small company, I'm the only HCE, and I'm pretty sure a mega-backdoor Roth would trigger the nondiscrimination stuff with the IRS for my employer.  (I also asked my boss if it'd be possible to take my profit sharing this year in the form of an employer contribution to the 401k, but that's a no-go for the exact reasons you'd expect.) Looking at the investment order sticky, that covers steps 0-7.

So, my current plan is to:
--Max out the 401k
--Max out the Roth IRA
--Put the rest into a taxable account
--Eat the 22% tax (yuck!)

I consider myself to be fairly well-informed on the topic of taxes, but with a suddenly-much-higher income and with no HSA/mega backdoor roth/529, I find myself unexpectedly scrambling for ways to reduce my tax exposure.  Is there anything obvious that I'm missing?

bacchi

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #1 on: February 24, 2021, 01:32:42 PM »
Bunch your donations and start a DAF. Consider donating brokerage stocks with high capital gains and then use your income to rebuy those stocks.

Obviously, this becomes a less effective strategy if you remain in the 22% bracket year after year.
 

JLee

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #2 on: February 24, 2021, 01:33:11 PM »
Congrats on the increased income!  You're already getting $10k off your tax bill back as child tax credit, no?

If you're at the absolute top end of 22% ($171,050) and you are only taking the standard deduction ($24,800), you're paying $9235 on $80,251 and $14,520 on the remaining $65,999, but then you get $10k off as credit so your $23,755 bill drops to $13,755, or an effective rate of 8%.

Unless I miscalculated somewhere, that seems pretty low to me!

reeshau

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #3 on: February 24, 2021, 01:34:42 PM »
I'd simply say: welcome to the 22% bracket.  It ain't all that bad!  It's not like you suddenly pay 22% on your whole income.  Your effective tax rate (average tax on total income) will be much lower.

Does you company have a 457 plan, or would your boss consider it?  They wouldn't be for me, particularly for a startup, as they are not safe in a corp. bankruptcy.  But it would be an option.

How against funding college are you?  Was that the broke you talking?  529's won't reduce federal tax, but there could be state tax benefits that may make them worth it.


Watchmaker

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #4 on: February 24, 2021, 01:41:25 PM »
Paying taxes ain't that bad. Congratulations on the income!

Does your spouse also fund a Roth IRA? Do they have earned income, and if so are they maxing their 401k?

zolotiyeruki

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #5 on: February 24, 2021, 01:57:45 PM »
Bunch your donations and start a DAF. Consider donating brokerage stocks with high capital gains and then use your income to rebuy those stocks.
Thanks for the suggestions!
"Bunching your donations" - do you mean the strategy of doing multiple years of donations in one year and itemizing, and then taking the standard deduction in the "off" years?
DAF - That's an interesting idea, and I would like to have lots of money available for charitable work when I retire, but the risk-averse (and selfish) side of me wants to secure my own retirement first before building up a charity engine.
I'll have to look into donations-in-kind, and see how/if I could make that work for me.  I wouldn't be able to take advantage of it for more than a few years--the vast majority of our savings is in IRAs and 401ks--and the tax savings would diminish as the cost basis catches up.
Does you company have a 457 plan, or would your boss consider it?  They wouldn't be for me, particularly for a startup, as they are not safe in a corp. bankruptcy.  But it would be an option.

How against funding college are you?  Was that the broke you talking?  529's won't reduce federal tax, but there could be state tax benefits that may make them worth it.
No 457 plan available--this isn't a government or non-profit employer.

I've been blessed to never be "broke," although there have been times when our budget has felt tight.  The opposition to funding our kids' college is twofold: 1) to teach our kids independence, frugality, and hard work, 2) take care of our own long-term finances first.  My parents paid for my plane ticket to college and a phone card to call home.  Aside from some help from my grandparents, DW and I made it through college through working and scholarships, and choosing a school that wasn't expensive.
Paying taxes ain't that bad. Congratulations on the income!

Does your spouse also fund a Roth IRA? Do they have earned income, and if so are they maxing their 401k?
Thanks!  DW is a SAHM, so no outside income there.  We plan to max out Roth IRA contributions for both of us this year.

zolotiyeruki

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #6 on: February 24, 2021, 02:01:17 PM »
Congrats on the increased income!  You're already getting $10k off your tax bill back as child tax credit, no?

If you're at the absolute top end of 22% ($171,050) and you are only taking the standard deduction ($24,800), you're paying $9235 on $80,251 and $14,520 on the remaining $65,999, but then you get $10k off as credit so your $23,755 bill drops to $13,755, or an effective rate of 8%.
You're right--in fact, until last year, the CTC has always knocked our tax bill to $0.

Of course, once you add back in FICA, state income tax, sales tax, and property tax (Illinois FTL!), my effective tax rate is considerably higher :)  Still a lot lower than if I had no kids.  But if I had no kids, I'd be a lot richer! :P

JLee

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #7 on: February 24, 2021, 02:06:22 PM »
Congrats on the increased income!  You're already getting $10k off your tax bill back as child tax credit, no?

If you're at the absolute top end of 22% ($171,050) and you are only taking the standard deduction ($24,800), you're paying $9235 on $80,251 and $14,520 on the remaining $65,999, but then you get $10k off as credit so your $23,755 bill drops to $13,755, or an effective rate of 8%.
You're right--in fact, until last year, the CTC has always knocked our tax bill to $0.

Of course, once you add back in FICA, state income tax, sales tax, and property tax (Illinois FTL!), my effective tax rate is considerably higher :)  Still a lot lower than if I had no kids.  But if I had no kids, I'd be a lot richer! :P

Wow, I can't remember the last time I paid no federal tax.  My property taxes alone (NJ...) are more than your entire federal tax bill :(

SimpleCycle

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #8 on: February 24, 2021, 02:32:18 PM »
As a W-2 employee you basically max a 401k and pay taxes on the rest.  FSA or HSA if your company has those.  There are education credits for paying for college, but you aren't planning to help pay for college.

There just aren't a lot of options for tax optimization on W-2 income.

bacchi

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #9 on: February 24, 2021, 03:03:02 PM »
Bunch your donations and start a DAF. Consider donating brokerage stocks with high capital gains and then use your income to rebuy those stocks.
Thanks for the suggestions!
"Bunching your donations" - do you mean the strategy of doing multiple years of donations in one year and itemizing, and then taking the standard deduction in the "off" years?

Right. You can make 2021 and 2022 donations this year and, combined with your mortgage interest and property taxes, go above the standard deduction. It probably won't help much unless you're in NJ where property taxes are brutal, so....

Quote
DAF - That's an interesting idea, and I would like to have lots of money available for charitable work when I retire, but the risk-averse (and selfish) side of me wants to secure my own retirement first before building up a charity engine.

=Bunching donations on steroids. I hear ya on waiting though.

zolotiyeruki

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #10 on: February 24, 2021, 03:32:24 PM »
Hmmm, it looks like my options are really limited...

Wow, I can't remember the last time I paid no federal tax.  My property taxes alone (NJ...) are more than your entire federal tax bill :(
Yeah, my IL property taxes are stupid high as well, like 3.5% of actual value.

Right. You can make 2021 and 2022 donations this year and, combined with your mortgage interest and property taxes, go above the standard deduction. It probably won't help much unless you're in NJ where property taxes are brutal, so....

With our absurdly high property taxes, I'm already well over the $10k deduction for SALT.  That said, before the SALT limitation went into affect, I *did* advance our charitable donations and pre-paid our property taxes for the next year. (FWIW, I think the SALT deduction limitation is a good thing)

reeshau

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #11 on: February 24, 2021, 04:38:28 PM »

Does you company have a 457 plan, or would your boss consider it?  They wouldn't be for me, particularly for a startup, as they are not safe in a corp. bankruptcy.  But it would be an option.

How against funding college are you?  Was that the broke you talking?  529's won't reduce federal tax, but there could be state tax benefits that may make them worth it.
No 457 plan available--this isn't a government or non-profit employer.

Well then, a non-qualified deferred plan, like a SERP?

https://www.investopedia.com/articles/personal-finance/052915/how-nonqualified-deferred-compensation-plans-work.asp

yachi

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #12 on: February 25, 2021, 08:07:50 AM »
The opposition to funding our kids' college is twofold: 1) to teach our kids independence, frugality, and hard work, 2) take care of our own long-term finances first.  My parents paid for my plane ticket to college and a phone card to call home.  Aside from some help from my grandparents, DW and I made it through college through working and scholarships, and choosing a school that wasn't expensive.
Congrats on making it through college without much (any?) debt!  And then finding an equally-blessed DW, that's great!  Do you remember what it took to qualify for the scholarships?
As far as minimizing taxes go, it looks like you could lock away 20K per year in a 529 plan and write it off your Illinois income, saving $990.  You have to pay this back if the funds are not used for educational expenses.  I don't know if a study abroad once you're FIRE counts (but if it did that would be awesome).

Elsewhere you mentioned you're waiting for the last of your children to graduate before you FIRE.  Keep in mind that by maintaining a high income while your kids are trying to qualify for financial aid, you're reducing their ability to pay for it on their own.  Colleges are limited to offering need-based financial aid beyond what gets calculated in the FAFSA, and each college makes the choice whether scholarships are going to be merit or need based.  What about working through a FAFSA with your current income and your FIRE income to calculate how much better off your kids would be with your lower FIRE income?  Maybe you'll find you want to save the difference between the aid available to your children, and the aid available to children at the average household income in Illinois.  Maybe you won't and that's fine.  Either way you'll have some information on what your kids will be up against.

I share the following because of the desire to teach your kids independence:  A family I know has parents that are high income, but basically told their children they would go to college, and didn't know how to make sure it was affordable.
One went to college and graduated with so much debt if took 5 to 6 years before they were no longer relying on their spouse, sometimes couldn't make payments and parents had to step in.  Now, at 12 years out of school could afford to be independent of spouse.
One went to college and graduated with high debt, made manageable because spouse had less debt.  Became a SAHM but hasn't made more money than the total of the student loans 12+ years after graduating.  Now, at 12 years out of school could afford get a job and be independent of spouse.
One went to college and didn't graduate.  Still has debt and relies on the spouse to make ends meet.  Not sure 12 years out of school could afford to be independent of spouse.

2) take care of our own long-term finances first.
I get this, and I think it's essential.  What will it look like to have taken care of your own finances first?  You mentioned you're going to be FI well before the original plan of age 51.  Is this including the recent 60k windfall?


lhamo

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #13 on: February 25, 2021, 10:02:06 AM »
Agree that you might want to look again at longer-term plans and the 529 as a holding bucket since you get a state deduction on it and will at least get tax deferred growth.

You don't have to use the 529 for your kids (though it will be assessed as a parental asset that you have to use 5.x% of toward your EFC).  You can save it for grandkids or use it for whatever and pay the taxes/penalties if you do that.  You can also use it for your own education/training.

The assumption that your kids will be able to pay their college costs themselves because you did is a dangerous one.  In the 70s/80s and maybe even in to the 90s it was possible to cover living costs + tuition at a state school with earnings from low wage PT work during the school year and FT work in the summers.   That is no longer the case due to rising tuition and living costs + stagnation of low end wages.  There are plenty of articles and books on this. 

zolotiyeruki

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #14 on: February 25, 2021, 10:43:01 AM »
The opposition to funding our kids' college is twofold: 1) to teach our kids independence, frugality, and hard work, 2) take care of our own long-term finances first.  My parents paid for my plane ticket to college and a phone card to call home.  Aside from some help from my grandparents, DW and I made it through college through working and scholarships, and choosing a school that wasn't expensive.
Congrats on making it through college without much (any?) debt!  And then finding an equally-blessed DW, that's great!  Do you remember what it took to qualify for the scholarships?
As far as minimizing taxes go, it looks like you could lock away 20K per year in a 529 plan and write it off your Illinois income, saving $990.  You have to pay this back if the funds are not used for educational expenses.  I don't know if a study abroad once you're FIRE counts (but if it did that would be awesome).

Elsewhere you mentioned you're waiting for the last of your children to graduate before you FIRE.  Keep in mind that by maintaining a high income while your kids are trying to qualify for financial aid, you're reducing their ability to pay for it on their own...

I share the following because of the desire to teach your kids independence:  A family I know has parents that are high income, but basically told their children they would go to college, and didn't know how to make sure it was affordable. <snip>

2) take care of our own long-term finances first.
I get this, and I think it's essential.  What will it look like to have taken care of your own finances first?  You mentioned you're going to be FI well before the original plan of age 51.  Is this including the recent 60k windfall?
I graduated with no debt.  I had 3 separate four-year scholarships that covered $1k/year, $1.5k/year, and 1.5*tuition.  It was a long time ago when I applied, but I remember applying for every scholarship our HS guidance office had that I qualified for, and IIRC most of the scholarships I received were merit-based.  I remember being really annoyed at the number of scholarships I *couldn't* apply for because I'm white and male, and my parents had good income, even though that income didn't pay for my college.

I've thought about 529 plans, but the fact that we'd only save the 5% state tax (not graduated) makes them less attractive.  It might be something we set up for our grandkids, though, since 18 years of compounding could produce some very nice tax-free gains for them. 

I'm actually teaching our kids (and a few others) a financial literacy class right now, and filling out the FAFSA sounds like a great exercise to do for one of the sessions.  One of the things we'll be looking at is the cost of college and how to make it affordable. 

"Taking care of our own long-term finances" basically means I want to be FI first, then decide if I would like to keep working to the benefit of others.  The original plan of 51 assumed no windfalls or profit sharing.

Well then, a non-qualified deferred plan, like a SERP?

https://www.investopedia.com/articles/personal-finance/052915/how-nonqualified-deferred-compensation-plans-work.asp
Hmmm, that sounds interesting, if a bit complicated.  Thanks for the link!

Smokystache

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #15 on: February 25, 2021, 11:21:28 AM »
The opposition to funding our kids' college is twofold: 1) to teach our kids independence, frugality, and hard work, 2) take care of our own long-term finances first.  My parents paid for my plane ticket to college and a phone card to call home.  Aside from some help from my grandparents, DW and I made it through college through working and scholarships, and choosing a school that wasn't expensive.

Elsewhere you mentioned you're waiting for the last of your children to graduate before you FIRE.  Keep in mind that by maintaining a high income while your kids are trying to qualify for financial aid, you're reducing their ability to pay for it on their own.  Colleges are limited to offering need-based financial aid beyond what gets calculated in the FAFSA, and each college makes the choice whether scholarships are going to be merit or need based.  ...
As a disclaimer, I'm not saying you need to pay for your children's college education - but I hadn't considered several points made by others. I'm not sure I'm going to even encourage my children to attend college -- and this is coming from a former college professor.

I hadn't thought about this (quote above), but the need-based college scholarship system would penalize children of higher income earners (when the parents don't contribute) and actually make it more difficult for the child to pay for college compared to children from a lower-income family. And it is difficult for children to become emancipated from their parents so they could be evaluated on their own assets (you have to move out, get married, or join the military).

As others have noted, college costs from when you were in college have increased dramatically. Even looking at in-state public college tuition, some sources suggest (after adjusting for inflation) it has increased 65% since you were in college [2000]
https://usafacts.org/articles/college-tuition-has-increased-but-whats-the-actual-cost
"After adjusting for inflation, the average undergraduate tuition, fees, room and board has more than doubled since 1964, from $10,040 to $23,835 in 2018. Tuition has recently grown the fastest at public and private non-profit institutions, for which tuition has gone up 65% and 50%, respectively, since 2000. Tuition at private for-profit institutions has only increased 11%."

You are to be commended for applying for lots of scholarships when you entered college, but also remember that in just the last 20 years many more 18-24 year-olds are attending college (2 or 4 year) now (about 6% higher). By my calculations, that means about 1.8 million more 18-24 year-olds are attending college than in 2000 - which means if the numbers and amounts of scholarships aren't keeping pace, the competition for those scholarships will be even tougher ... and  children from more well-off families would be especially penalized given that almost every scholarship considers financial need  - which they, rightly or wrongly, base on FAFSA/family income.

I am mostly writing this because it is new information for me and I may need to adjust my views on helping my own children - not as an effort to change the OPs mind. As a former college professor, I've seen families take on crazy college debt so that their child could be a 4th string player on a Div III sports team (I wish this was an exaggeration. It's not).  That seems somewhat insane to me.

chagan

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #16 on: February 25, 2021, 11:35:55 AM »
OP - congrats on becoming the first HCE at your shop.. I am sure its a good feeling, obv the extra tax burden is a bummer, but a good problem to have.

I like the idea of DAF as mentioned by @bacchi (I am guessing that stands for Donor advised funds)?.. It was something new that I learnt recently from @Dicey .. maybe you can front loading some money into it?

Only thing to look out for is you cannot do non traditional donations .. you can only donate those $$$ to IRS approved charities in the future.

yachi

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #17 on: February 25, 2021, 11:56:46 AM »
OP - congrats on becoming the first HCE at your shop.. I am sure its a good feeling, obv the extra tax burden is a bummer, but a good problem to have.

I like the idea of DAF as mentioned by @bacchi (I am guessing that stands for Donor advised funds)?.. It was something new that I learnt recently from @Dicey .. maybe you can front loading some money into it?

Only thing to look out for is you cannot do non traditional donations .. you can only donate those $$$ to IRS approved charities in the future.
Right.  Your DAF will only be able to distribute the money to a qualified 501(c)(3) charity.  That's because the DAF is itself a 501(c)(3) charity.  You get the tax benefit when the money is given to the DAF.  The other benefit is that many DAFs can handle:

Cash/check, appreciated securities, mutual funds, complex assets like private equity, non-publicly traded stock, LLC or LP interest, hedge fund interest, insurance policies, real estate, art, and more.

So don't drop off your van Gogh at your local Goodwill, instead donate it to your DAF.  They'll sell it, deposit the money in your DAF, and you can have them write a check to Goodwill.

chagan

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #18 on: February 25, 2021, 12:16:37 PM »
Perfect example on the Van Gogh to better explain the DAF. makes sense.

zolotiyeruki

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #19 on: February 26, 2021, 08:22:10 AM »
@Smokystache - thanks for your insights.  It looks like at my alma mater, tuition has roughly doubled and housing is up 50%ish since I went there.  I'm surprised that there are only 6% more 18-24-year-olds attending college compared to 20 years ago.  I would have thought that population growth alone would drive that number much higher.  It's saddening (IMO) to see my college spend what I would guess is hundreds of millions of dollars making the campus fancier--they tore down the basic-but-functional freshman dorms that housed 1,400 students, and put in much lower-density (and rather posh) apartments in their place.  But that's a rant for another day...

@lhamo - We'll be talking to our kids a bunch this weekend about saving for college or trade school.  Because they're homeschooled, they have more time available to earn money toward college, and the oldest two are currently working 10 hours/week, which will help a lot.  Right now, I plan to encourage them to contribute to a Roth IRA as much as they can--they'll be able to pull out their contributions penalty-free for college, and the rest will grow all the way to retirement, and since they're pretty close to college already, the foregone gains won't be a ton.  I've thought about doing some sort of matching to encourage it, but that's a discussion I need to have with DW.

The DAF idea is intriguing one, that I'll need to analyze more.  The concept of contributing a lot now, when income is higher, and then doing outgoing donations later, is very attractive.
« Last Edit: February 26, 2021, 12:57:19 PM by zolotiyeruki »

Smokystache

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #20 on: February 26, 2021, 09:45:24 AM »
@Smokystache - thanks for your insights.  It looks like at my alma mater, tuition has roughly doubled and housing is up 50%ish since I went there.  I'm surprised that there are only 6% more 18-24-year-olds attending college compared to 20 years ago.  I would have thought that population growth alone would drive that number much higher.  It's saddening (IMO) to see my college spend what I would guess is hundreds of millions of dollars making the campus fancier rather--they tore down the basic-but-functional freshman dorms that housed 1,400 students, and put in much lower-density (and rather posh) apartments in their place.  But that's a rant for another day...

I agree - I think colleges are racing to out-fancy one another and they are making poor choices on what things to invest in (almost always buildings) vs holding the line on costs and providing a great education for a reasonable price. I had to read it a few times, but the 6% refers to the percentage of all 18-24 year-olds. Another version of this statistic is 63% of all HS graduates went straight to college in 2000 and in 2018 69% of them went directly to college (2 or 4 yr). I think that's almost a 10% increase over that time period.

Thanks for starting this thread, it's given me a lot to think about.

ysette9

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I'm suddenly a HCE, want to minimize taxes
« Reply #21 on: March 01, 2021, 03:28:04 PM »
I am incredibly grateful that my parents helped my sister and I pay for college so we graduated debt-free. That was an enormous gift and leg up in life. Iím almost 40 and know people who still have student loans that strongly impact the choices they have in life. I never want that kind of indentured servitude for my kids.

That said, we both went to junior college for free on GPA-based scholarships. We went to public schools when we transferred. We worked internships and saved money from part time jobs. But we never would have been able to graduate without student loans if it werenít for our parents.

The really important thing to me personally is that age (late teens, early to mid twenties) is a time of incredible growth and self exploration. I had no idea who I was or wanted to be then. Having a safe space to explore as try out different majors and generally take some time to get my shit worked out was So Important to me later being a responsible and independent adult. My sister switched majors something like three times and spent four years at junior college to find her way. And it was totally fine. We needed that safe time and space to be ready to make the most of university. If we had been stressed out and rushed due to the dark cloud of student debt hanging over us we wouldnít be as happy or successful today. Much better to leisurely figure out the right path as a 19 year old than five years into your career figure out you hate it.

For our kids we are saving some money in 529s. We will help them make responsible decisions when the time comes, as is our job as parents for anything having to do with money. Iím not going to say Iíll cover however long it takes to get a philosophy degree from a no-name private college but I would like to do a lot to have them graduate with little or no debt, especially since our own retirement is secure at this point.
« Last Edit: March 01, 2021, 03:29:50 PM by ysette9 »

zolotiyeruki

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #22 on: March 02, 2021, 05:36:07 AM »
I am incredibly grateful that my parents helped my sister and I pay for college so we graduated debt-free. That was an enormous gift and leg up in life. Iím almost 40 and know people who still have student loans that strongly impact the choices they have in life. I never want that kind of indentured servitude for my kids.

That said, we both went to junior college for free on GPA-based scholarships. We went to public schools when we transferred. We worked internships and saved money from part time jobs. But we never would have been able to graduate without student loans if it werenít for our parents.

The really important thing to me personally is that age (late teens, early to mid twenties) is a time of incredible growth and self exploration. I had no idea who I was or wanted to be then. Having a safe space to explore as try out different majors and generally take some time to get my shit worked out was So Important to me later being a responsible and independent adult. My sister switched majors something like three times and spent four years at junior college to find her way. And it was totally fine. We needed that safe time and space to be ready to make the most of university. If we had been stressed out and rushed due to the dark cloud of student debt hanging over us we wouldnít be as happy or successful today. Much better to leisurely figure out the right path as a 19 year old than five years into your career figure out you hate it.

For our kids we are saving some money in 529s. We will help them make responsible decisions when the time comes, as is our job as parents for anything having to do with money. Iím not going to say Iíll cover however long it takes to get a philosophy degree from a no-name private college but I would like to do a lot to have them graduate with little or no debt, especially since our own retirement is secure at this point.
If you're willing to share, how much of your college costs were you able to cover yourself, and how much did you parents pay for?  And was there any structure with regards to what each of you paid for?

ysette9

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #23 on: March 02, 2021, 11:49:00 AM »
I am incredibly grateful that my parents helped my sister and I pay for college so we graduated debt-free. That was an enormous gift and leg up in life. Iím almost 40 and know people who still have student loans that strongly impact the choices they have in life. I never want that kind of indentured servitude for my kids.

That said, we both went to junior college for free on GPA-based scholarships. We went to public schools when we transferred. We worked internships and saved money from part time jobs. But we never would have been able to graduate without student loans if it werenít for our parents.

The really important thing to me personally is that age (late teens, early to mid twenties) is a time of incredible growth and self exploration. I had no idea who I was or wanted to be then. Having a safe space to explore as try out different majors and generally take some time to get my shit worked out was So Important to me later being a responsible and independent adult. My sister switched majors something like three times and spent four years at junior college to find her way. And it was totally fine. We needed that safe time and space to be ready to make the most of university. If we had been stressed out and rushed due to the dark cloud of student debt hanging over us we wouldnít be as happy or successful today. Much better to leisurely figure out the right path as a 19 year old than five years into your career figure out you hate it.

For our kids we are saving some money in 529s. We will help them make responsible decisions when the time comes, as is our job as parents for anything having to do with money. Iím not going to say Iíll cover however long it takes to get a philosophy degree from a no-name private college but I would like to do a lot to have them graduate with little or no debt, especially since our own retirement is secure at this point.
If you're willing to share, how much of your college costs were you able to cover yourself, and how much did you parents pay for?  And was there any structure with regards to what each of you paid for?
We lived in a county where the local bank set up a trust for its profits to fund the junior college, so it was a great school and offered scholarships to most graduating secular in the county based on GPA. I got good w Pugh grades that the scholarship paid for tuition, books, parking, and incidentals. I lived at home with my parents for two years during that time.

My first year I went to school four days a week and worked the other three days a week. That allowed me to save a few thousand dollars. The second year the math and science classes got too hard for me to be able to hold down a job. I transferred to a local university and my savings were able to pay for a pit one year of tuition. However housing and books far outstripped anything I could have afforded so my parents gave me a monthly stipend. They paid for more semesters than I did even though I got well-paying engineering internships two summers in a row.

Tuition doubled in the 2.5 years I was at that university and it is higher now.

If I had lived at home and gone to the lower rated local college I might have been able to pay for it, or at least not graduated with a bunch of debt. I donít regret the path I took because I got an engineering degree from a top ten university and got jobs at a fortune 100 company that led to a great career. Iím pretty sure I wouldnít have had those opportunities if I had stayed close to home.

zolotiyeruki

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #24 on: March 02, 2021, 01:46:27 PM »
Tuition doubled over 2.5 years?  Holy smokes.

In other work-and-retirement-plans news, last night I actually started paying attention, did some poking around, and realized that all of the fund options for our company's 401k are Fidelity funds, almost all of which have expense ratios over 1%.  I was *not* happy to learn that, and neither was my boss (he wasn't aware, either).  Over the nearly 10 years I've been here, that adds up to a noticeable chunk of change.  I reached out to the person in charge of that stuff, and they're working to fix that "this year."

reeshau

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #25 on: March 02, 2021, 02:11:05 PM »
Tuition doubled over 2.5 years?  Holy smokes.

In other work-and-retirement-plans news, last night I actually started paying attention, did some poking around, and realized that all of the fund options for our company's 401k are Fidelity funds, almost all of which have expense ratios over 1%.  I was *not* happy to learn that, and neither was my boss (he wasn't aware, either).  Over the nearly 10 years I've been here, that adds up to a noticeable chunk of change.  I reached out to the person in charge of that stuff, and they're working to fix that "this year."

I'm surprised Fidelity funds, even actively managed ones, are that expensive.  If they are public funds, you might compare the expense ratio in your 401k to that publicly listed.  The difference will be one of the embedded fees to manage the 401k; one that your company could choose to cover itself, or push on the participants.  If the difference is large, you could go back with that fact.

The other way to see fees directly is if you use Fidelity BrokerageLink for a brokerage window.  Because of the account structure, they can't charge fees from there, and instead add to the fees you have within the 401k's offerings.  I used to work for a Fortune 50 company that used Fidelity.  Our embedded management fee was .11%.

zolotiyeruki

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #26 on: March 02, 2021, 03:22:04 PM »
Tuition doubled over 2.5 years?  Holy smokes.

In other work-and-retirement-plans news, last night I actually started paying attention, did some poking around, and realized that all of the fund options for our company's 401k are Fidelity funds, almost all of which have expense ratios over 1%.  I was *not* happy to learn that, and neither was my boss (he wasn't aware, either).  Over the nearly 10 years I've been here, that adds up to a noticeable chunk of change.  I reached out to the person in charge of that stuff, and they're working to fix that "this year."

I'm surprised Fidelity funds, even actively managed ones, are that expensive.  If they are public funds, you might compare the expense ratio in your 401k to that publicly listed.  The difference will be one of the embedded fees to manage the 401k; one that your company could choose to cover itself, or push on the participants.  If the difference is large, you could go back with that fact.
Great question--I checked last night, and the ER in the retirement plan matched the publicly-listed ER.

Right now, I'm leaning hard toward the DAF--apparently, one of the owning partners has done it, so even though I had never heard of it, it's not exactly unexplored ground :)

ysette9

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #27 on: March 02, 2021, 04:52:06 PM »
Tuition doubled over 2.5 years?  Holy smokes.

In other work-and-retirement-plans news, last night I actually started paying attention, did some poking around, and realized that all of the fund options for our company's 401k are Fidelity funds, almost all of which have expense ratios over 1%.  I was *not* happy to learn that, and neither was my boss (he wasn't aware, either).  Over the nearly 10 years I've been here, that adds up to a noticeable chunk of change.  I reached out to the person in charge of that stuff, and they're working to fix that "this year."
Hot damn, that is high. I literally finished up writing an article on the impact of expense ratios a few minutes ago so my mind is buzzing with charts and tables on how those fees add up. Best of luck to you in improving that situation.

badger1988

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #28 on: March 02, 2021, 07:29:12 PM »
I'd also vote for the DAF. I originally looked into it when the Trump tax plan went into effect for reasons already mentioned above. My general strategy the past 4 years has allowed us to always land right on the upper limit of the 12% bracket with W-2 income ranging from 120k-160k:
1. Try to keep household expenses reasonably low
2. Max 401k contribution
3. Max HSA contribution
4. Max 2x Roth IRA contribution (my wife is also a SAHM)
5. Donate all remaining income to DAF*
6a. If after this taxable income > upper limit of 12% bracket, roth conversion (from wife's old 401k rollover) correct amount to land exactly there
6b. If after this taxable income < upper limit of 12% bracket, recharacterize correct amount (from #4 above) to land exactly there, or get as close as possible. I haven't needed to do this yet.

*For years when income will be low enough to make sense, I take the standard deduction and move contributions to either previous or following year.

Another note, I have three kids. Oldest (twins) are 13 years out from being college-aged. I also have no plans to contribute to 529s, or significantly to college expenses if they decide to go, though I'll work with them on the specifics of a mutually agreeable plan as they get older. I do plan to be retired before then, so I'm not concerned with them being "disadvantaged" by my income. Honestly, I think there is a good chance (especially if I'm retired) that they will have a lot of free education opportunities available to them at that time.

yachi

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Re: I'm suddenly a HCE, want to minimize taxes
« Reply #29 on: March 03, 2021, 08:44:55 AM »
I think we did a fair job of listing the benefits of a DAF.  One of the drawback is the money is no longer available to you personally.  No amount of taxes and penalties can be paid to get it back.
Here's how FidelityCharitable puts it:
"A contribution to a donor-advised fund is an irrevocable commitment to charity; the funds cannot be returned to the donor or any other individual or used for any purpose other than grantmaking to charities."