Tax Optimization Question

[sunilpatel72]

Can the intelligent people of this community help with the following:

Filing MFJ with 2 dependents under 16
Wages = $95,915
Qual Div = $1,205
STCG Cap Gains = $1,254
Total Inc = $98,374
Std Ded = $12,700
Exemptions = $16,200 ($4050 * 4)
Taxable Inc = $69,474 (15% Marginal Tax Bracket)

I'm having difficulty in determining how to optimize my taxes and was wondering:

1.) Should I invest $11,000 in Roth IRAs (me/spouse) and fill up the remainder of the 15% bracket (upto $75,900) with $6,426 of T-IRA to Roth IRA conversion?

or

2.) Should I invest $11,000 in T-IRAs (me/spouse) which will be 100% deductible and drop my taxable income to $58,474? If I do this, it leaves a lot of room in the 15% bracket, so can I do anything further?

Any advice will help clear this up!

[seattlecyclone]

It depends. In general the way to optimize your taxes is to keep your income as smooth as possible from year to year.

Do you expect your income to grow into the next higher tax bracket as you move through your career and stay there when you retire? If so, now might be a good time to do some Roth contributions.

Do you expect to reduce your income during retirement, maybe going down to the 10% bracket? If so, now might be a good time to do some traditional contributions.

Remember that Roth withdrawals during retirement generally don't count as income, so if most of your savings are in Roth accounts at that time it's likely that your retirement income will be very low indeed. I personally believe that traditional contributions should be the default choice for the vast majority of Mustachians unless they have some strong reason to expect a high retirement income.

Anything further beyond IRAs would include employer-based retirement accounts like a 401(k) or 403(b), but since it's nearing the end of the year chances are it's too late to do much in this area for 2017.

[sunilpatel72]

Thanks seattlecyclone for the response.

I have/will  max out my 401k and HSA along with my spouse's 457b and half of her 403b, so I feel we are doing a good job with putting in as much as we can into tax-deferred accounts. This is also the reason we are able to get into the 15% tax bracket.

Approximately 27% of our retirement savings are in Roth IRAs and the rest in tax-deferred.

Currently, we are 45/44 and would both like to slow down from work over the next few years, so I anticipate our earned income will go down substantially. Would it be better to do Roth conversions then? Should we just add the $11K to our T-IRAs?

Thoughts?

[batemama]

Are you not right on the edge of the saver's credit income limit?  If you put into a T-IRA and drop your income down below $62K, you get 10% of your retirement contributions back (up to $4k) as a tax credit.

EDIT: rereading your numbers, I think I am mistaken.  It needs to be $62k before deductions.  I'm assuming the wages you listed were after your deferred savings.

[sunilpatel72]

Thanks Batemama.

The taxable income of $69,474 was after deferred savings, but before $11k T-IRA contributions. If I contribute to T-IRAs, the entire $11K is deductible lowering my taxable income to $58,474.

I don't think I qualify for saver's credit, but was wondering which of the 2 paths I should choose.

[terran]

Thanks Batemama.

The taxable income of $69,474 was after deferred savings, but before $11k T-IRA contributions. If I contribute to T-IRAs, the entire $11K is deductible lowering my taxable income to $58,474.

I don't think I qualify for saver's credit, but was wondering which of the 2 paths I should choose.

No, you're not. I had the same thought, but you'd need to get your AGI (not taxable income) under $63k.

Another thought worth considering is that if the tax bill passes, the new 12% bracket will line up pretty closely to the current 15% bracket, so if you expect your income to be similar I wonder if it might make sense to hold off on traditional to roth conversions, or even consider traditional contributions that you then convert next year and beyond to save the extra 3%?

[sunilpatel72]

Thanks for the thought terran.

My AGI (even with $11K deductible T-IRAs) would only get down to $87,374. It seems most of the advice so far is leaning towards contributing to the T-IRAs and doing Roth conversions in later years when we hope to have lower earned income.

Let me know if anyone else has any other thoughts/ideas.

[MDM]

Wages = $95,915

Just to clarify: is that $95,515 after subtracting the "401k and HSA along with...spouse's 457b and half of her 403b"?

In other words, is your gross income ~$148,000?