Author Topic: The Mustache Tax Guide (U.S. Version)  (Read 135413 times)

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #50 on: November 11, 2015, 12:02:57 PM »
Love the LC series, by the way :)

Thanks!

Johnny is correct on both fronts but I'll add a bit more info.

Your FSA is limited to $5K, and pre ALL tax. So you have to factor FICA into the mix. However, it might not be clear cut for you at 7.65%. You used 28% in your calculation, which indicates high income. If your wages exceed $118K/yr, you max out your Social Security at the top of that wage base. This means even if you get this deduction pre-tax, you might not benefit fully from the reduction in FICA tax. If your taxable wages > (118,000 + 5,000) or $123,000, you might only benefit as follows by using the FSA:

5,000
x 28% (Fed) x ?% (State/Local) x 1.45% (Medicare)

After that you should use the dependent care credit. As johnny mentioned, it's a credit not a deduction. You will receive 20% back below your income tax calculation (it's as if you paid in extra federal withholdings). Since you are already maxing out the FSA at $5,000, and the limit is $6,000, I would advise putting $1,000 on this form. You can claim expenses here that weren't reimbursed by an FSA.

It gets even more complex than that though, and this is the real reason why the FSA should be maxed: It lowers everything. FICA wages base, taxable wages on W-2, which in turn reduces your AGI, which in turn can increase other deductions/credits you aren't getting (like the child tax credit, although you may be phased out of that since you are in the 28% bracket, but with enough work you might be able to get this and other benefits). It also lowers any taxable income on a state or city tax return since your taxable wages (Box 1 on the W-2) will be lowered by the FSA withholding. The dependent care credit is a federal credit, and I know my state doesn't have a similar one.

Max out the FSA. It's worth it. If you are still unsure, send me a PM with the numbers and I'll let you know exactly how much it benefits you.

smoghat

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #51 on: November 12, 2015, 11:44:42 AM »
A really good CPA is worth his or her weight in gold. Now if you are retiring with an expected $38,000 a year of income, more power to you, but if you crack a million, a good CPA is an excellent resource. For my last three years of work, I paid about $1,000 a year to my CPA and about $3,000 a year to the IRS on $80,000 of traditional salaried income and $100k to $150k of earnings from my businesses.

Do YOU really know what are the red flags for an audit? If so, great, you are a superhero. Does a CPA with HR Block? Maybe not. But if you establish a relationship with someone who knows what he or she is doing and has been in the business for a long time, that info is invaluable and dirt cheap. The last time we saw our CPA he sat us down and talked to us about our financial plans (we just retired at 48, expected income between $160k and $250k for the first decade) for three hours. Charge? None. After 18 years we are valued customers. Oh, but since he works 120 miles away and it was our 30th high school reunion and we were hosting a party at a house we were renting for the weekend, we did get to deduct the hotel room as a tax plan on expense (IRS doesn't care how much we spent on the room, it makes sense to them and who cares where we went for dinner the next day). There's. 40% discount on the room.


deeshen13

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #52 on: November 23, 2015, 08:32:45 AM »
"If I could highlight one thing from this section, it would be for the reader to realize there is an automatic $20,600, tax-free space in 2015 for a married couple. These numbers are adjusted for inflation each year. Given proper tax planning efforts, you should do everything in your power to create enough income each year to fill this space. The Roth Pipeline (conversion ladder), or simply withdrawing funds from a Traditional IRA will help with this."



Can someone explain this a little further for me please? Does this mean you can transfer $20,600 each year from a 401k over to a Roth IRA and avoid taxes?
If you had no other income, yes that's exactly what it means.  Very important part of your withdrawal strategy - minimizing taxes really helps extend the life of your portfolio.

Can someone elaborate on how we came up with $20,600 as the available amount for the backdoor Roth in 2015?  I assume its standard deduction + contribution limits of Roth + ??? = 12,600 + 5,500 = 18,100.  What am I missing?  Thanks!

Oh, and thanks so much for this thread.  Really appreciate the succinct advice in one place.

johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #53 on: November 23, 2015, 08:35:27 AM »
"If I could highlight one thing from this section, it would be for the reader to realize there is an automatic $20,600, tax-free space in 2015 for a married couple. These numbers are adjusted for inflation each year. Given proper tax planning efforts, you should do everything in your power to create enough income each year to fill this space. The Roth Pipeline (conversion ladder), or simply withdrawing funds from a Traditional IRA will help with this."



Can someone explain this a little further for me please? Does this mean you can transfer $20,600 each year from a 401k over to a Roth IRA and avoid taxes?
If you had no other income, yes that's exactly what it means.  Very important part of your withdrawal strategy - minimizing taxes really helps extend the life of your portfolio.

Can someone elaborate on how we came up with $20,600 as the available amount for the backdoor Roth in 2015?  I assume its standard deduction + contribution limits of Roth + ??? = 12,600 + 5,500 = 18,100.  What am I missing?  Thanks!

Oh, and thanks so much for this thread.  Really appreciate the succinct advice in one place.

A married couple can claim the standard deduction of $12600 and two exemptions of $4000 each. The Roth contribution limit has nothing to do with it, and neither does the backdoor Roth. A backdoor Roth is used when your income is too high to contribute to a Roth directly.

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #54 on: November 23, 2015, 08:39:14 AM »
Johnny beat me to it but I'll post my reply anyway:

1) It's not a backdoor Roth (which is a contribution to a Roth when you are ineligible due to income), it's a conversion to a Roth as part of a Ladder or as part of proper tax planning during your drawdown.

2) It assumes a married couple, and uses 2015 tax rules which will be adjusted for inflation each year.

3) Standard deduction = 12,600

4) Personal exemption =   4,000 ( x 2 for a married couple)

If you have a big amount of itemized deductions you can increase that $12,600 accordingly. If you have 5 kids you can increase the exemptions accordingly.

deeshen13

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #55 on: November 23, 2015, 10:19:42 AM »
Straightforward enough; thanks guys.

Penny Lane

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #56 on: December 02, 2015, 07:19:26 AM »
This is such a good thread; thanks to Cheddar for doing all this work to help us!

I have a Roth ?-- I have always made too much to have one, but now that I am mostly retired and consult I will be eligible this year.  Do I have until 4.15.16 to fund one?  Do I have to set up the actual account before 12.31.15?  I am also considering doing some Roth conversion as I have massive tIRA's/401K's; can I do that early in 2016 when I have a better idea of my tax situation?  I will still be in 25%ile and perhaps I should fill that?  I am in my early 60's-- would I still have to wait 5 yrs before accessing the Roth $ ( although I would not plan to touch it for a long time)?  I figured out about how much my required draws will be at 70.5--whoa!

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #57 on: December 02, 2015, 10:19:32 AM »
This is such a good thread; thanks to Cheddar for doing all this work to help us!

; )  Just doing my part, so many great resources around this place.

If I'm you I'd put together a spreadsheet detailing annual anticipated growth of the Traditional accounts and annual anticipated conversations from T to R. You must do the RMD's when the time comes, and if they will bump you into the 25% bracket on their own you might as well start pulling them out now and filling up all of the 15% bracket and maybe even continue into the 25% bracket.

Try to get the lowest effective tax rate over the next 30 years, don't worry about 2016 or 2017 alone.

You can do the conversion in early 2016, the only reason to wait would be if you want to see how the rest of the year plays out. You can open the Roth account (if you don't already have one) anytime before 4/15 each year. I'm unsure the answer on the 5 year waiting period on a Roth after you turn 59.5, but it seems like you should have immediate access to everything. Google should be able to answer that if someone else here doesn't.

johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #58 on: December 02, 2015, 10:30:48 AM »
You can do the conversion in early 2016, the only reason to wait would be if you want to see how the rest of the year plays out.

Penny Lane can certainly do a conversion in early 2016, however, that conversion will be counted towards the 2016 tax year, NOT 2015.

To do an "after the fact" conversion for the 2015 tax year, one must convert far more than one actually intends in 2015. Then in early 2016, before filing taxes, one can recharacterize a portion (or all if one desires) of the conversion amount. This would let one treat that portion of the conversion as if it never happened.
(Technically this can be done through 10/15 by amending one's taxes or filing for an extension, but it is much easier to just do it before one files one's tax return).
For more details, read here.

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #59 on: December 02, 2015, 10:40:58 AM »
You can do the conversion in early 2016, the only reason to wait would be if you want to see how the rest of the year plays out.

Penny Lane can certainly do a conversion in early 2016, however, that conversion will be counted towards the 2016 tax year, NOT 2015.

To do an "after the fact" conversion for the 2015 tax year, one must convert far more than one actually intends in 2015. Then in early 2016, before filing taxes, one can recharacterize a portion (or all if one desires) of the conversion amount. This would let one treat that portion of the conversion as if it never happened.
(Technically this can be done through 10/15 by amending one's taxes or filing for an extension, but it is much easier to just do it before one files one's tax return).
For more details, read here.

Agree.

I was working under the mistaken assumption (shame on me) that Penny just retired after making a very high wage in 2015 . If that's the case, no reason to pile on more income in 2015, but after a re-read it's clear income is down in 2015. It's worth considering converting some in 2015 if the numbers work out in favor of that, and the conversion is included in income in the year it's initiated.

grenzbegriff

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #60 on: December 02, 2015, 02:48:48 PM »
Hi Cheddar Stacker, and others.  Very nice guide, it was simple enough for me to understand.

In the past I've always taken the standard deduction.  But as tax time approaches I'm investigating and I believe I will want to take itemized deduction this time.  I'd love for someone to check my logic:

Gross income: ~$200k
401k contribution: ~$18k  (employer matched +$9k)
Charitable giving: ~$12k
California state income tax: ~$14k  (on income of $170k due to above)

If I understand right, this means my adjusted gross income for federal income tax will be ~$156k if I take the itemized deduction.  Does that sound correct?  Would my adjusted gross income be ~$200k - $6300 if I were to take the standard deduction?  (I'm single with no dependents.)

That seems like a fairly huge benefit to taking itemized deduction, but I might be figuring wrong. 
« Last Edit: December 02, 2015, 02:54:03 PM by grenzbegriff »

johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #61 on: December 02, 2015, 02:58:53 PM »
Hi Cheddar Stacker, etc.

In the past I've always taken the standard deduction.  But as tax time approaches I'm investigating and I believe I will want to take itemized deduction this time.  But I'd love for someone to check my logic:

Gross income: ~$200k
401k contribution: ~$18k  (employer matched +$9k)
Charitable giving: ~$12k



If I understand right, this means my adjusted gross income for federal income tax will be ~$156k if I take the itemized deduction.  Does that sound correct? 
No. Because of a technicality. Your standard/itemized deduction does not affect your AGI.
Taxable income = AGI - std or itemized deduction - exemption(s).
This is an important distinction because your eligibility for other deductions and credits is dependent on your AGI, not your taxable income.

The exemption is $4k. So you will have $152k in federal taxable income.

Would my adjusted gross income be ~$200k - $6300 if I were to take the standard deduction?  (I'm single with no dependents.)
No, your AGI would be
$200k - 18k = $182k in either case (standard or itemized deduction).

You would have a taxable income of $171,700 if you took the standard deduction instead of itemizing (remember, $4000 for personal exemption).

You said:
California state income tax: ~$14k  (on income of $170k due to above)
Does CA give you a deduction for charitable giving? Because you've made the same mistake again. Your Federal AGI is $182k. Not $170k. I assume that CA like most states taxes you based on your federal AGI (and with their own deductions and exemptions).

Make sure you've got documentation for that $12k in charitable giving.

seattlecyclone

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #62 on: December 02, 2015, 03:01:00 PM »
Hi Cheddar Stacker, and others.  Very nice guide, it was simple enough for me to understand.

In the past I've always taken the standard deduction.  But as tax time approaches I'm investigating and I believe I will want to take itemized deduction this time.  I'd love for someone to check my logic:

Gross income: ~$200k
401k contribution: ~$18k  (employer matched +$9k)
Charitable giving: ~$12k
California state income tax: ~$14k  (on income of $170k due to above)

If I understand right, this means my adjusted gross income for federal income tax will be ~$156k if I take the itemized deduction.  Does that sound correct?  Would my adjusted gross income be ~$200k - $6300 if I were to take the standard deduction?  (I'm single with no dependents.)

That seems like a fairly huge benefit to taking itemized deduction, but I might be figuring wrong. 


Your adjusted gross income is the number on the bottom of the first page of your Form 1040. This includes the income reported on your W-2, other income from investments or other sources, and a select few deductions. It does not include the standard deduction, itemized deductions, or personal exemptions.

Your adjusted gross income would be $200k - $18k = $182k. The $156k number (actually $152k since you should also get a $4k personal exemption) is your taxable income if you choose to itemize deductions. Charitable giving and state tax are both itemized deductions. Your itemized deductions are much large than your standard deduction, so you're correct that you would probably benefit from itemizing. Given your high income and high state tax, you may be in AMT territory, so be aware of that possibility.

grenzbegriff

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #63 on: December 02, 2015, 03:23:10 PM »
Thanks!

So for deciding whether to itemize, if your AGI is high enough that your state income tax is more than $6300, you probably should itemize.

For recording charitable giving, it's all through paycheck deduction or credit card, so that should be straightforward according to this IRS page.


One further question:  If I understand right, I can't get any tax deduction by contribution to a traditional IRA because my income is too high.  (Example calculation: http://i.imgur.com/J0KgcIn.png).  Since I'm expecting to have a much lower income by age 40 than I do now, I don't think using a Roth IRA makes sense.  So I'm not intending to contribute at all to an IRA.  Does that make sense?  (I often hear people talking about IRAs but every time I investigate I don't see a benefit for me.)


johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #64 on: December 02, 2015, 03:32:46 PM »
One further question:  If I understand right, I can't get any tax deduction by contribution to a traditional IRA because my income is too high.  (Example calculation: http://i.imgur.com/J0KgcIn.png).  Since I'm expecting to have a much lower income by age 40 than I do now, I don't think using a Roth IRA makes sense.  So I'm not intending to contribute at all to an IRA.  Does that make sense?  (I often hear people talking about IRAs but every time I investigate I don't see a benefit for me.)

No. You can do a backdoor Roth IRA. I'm sure it's been mentioned at some point earlier in this thread, but you can read about it here.

If you currently have a Traditional, SEP, or SIMPLE IRA, it's not always clear if you should use the backdoor. If this pertains to you, we can guide you on that - just tell us the balance of the aforementioned IRAs.

MDM

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #65 on: December 02, 2015, 03:42:25 PM »
So for deciding whether to itemize, if your AGI is high enough that your state income tax is more than $6300, you probably should itemize.
There is a more direct way: "You should itemize deductions if your allowable itemized deductions are greater than your standard deduction" - see https://www.irs.gov/taxtopics/tc501.html.  See also https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Deductions-and-Credits/Tax-Deduction-Wisdom---Should-You-Itemize-/INF12061.html for even more details.

Quote
For recording charitable giving, it's all through paycheck deduction or credit card
That may be true for you.  In general, gifts via check, cash, property donation, etc. are also legitimate ways to have charitable giving.

Quote
Since I'm expecting to have a much lower income by age 40 than I do now, I don't think using a Roth IRA makes sense.
Why not?
Have you compared your spendable income from a taxable account vs. a Roth account, starting with the same initial contribution?  Be sure to include any federal and state tax on the taxable account's annual earnings and the long term capital gains when sold.  Taxable could be "better" than Roth if you assume losses and Tax Loss Harvesting, but....

Cheddar Stacker

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #66 on: December 02, 2015, 03:43:41 PM »
Hi Cheddar Stacker, and others.  Very nice guide, it was simple enough for me to understand.

In the past I've always taken the standard deduction. 

Johnny and Seattle have all your questions covered, but I'd consider posting some details here from your 2014 tax return, and 2013, and 2012. And do it quickly because the statute of limitations for 2012 will likely be running out within 4 months.

If your potential itemized deductions from those years exceeds the standard deduction (your state tax alone would if you made that much income) you can amend those tax returns and get refunds. You'd have to amend the California returns as well. It's not a terribly hard thing to do, but you might want to find a friend or a tax expert to help if you haven't done it before.

It could be worth a few thousand dollars, so paying someone a few hundred to do it is better than doing nothing if you're unsure how to do it.

seattlecyclone

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #67 on: December 02, 2015, 03:54:25 PM »
One further question:  If I understand right, I can't get any tax deduction by contribution to a traditional IRA because my income is too high.  (Example calculation: http://i.imgur.com/J0KgcIn.png).  Since I'm expecting to have a much lower income by age 40 than I do now, I don't think using a Roth IRA makes sense.  So I'm not intending to contribute at all to an IRA.  Does that make sense?  (I often hear people talking about IRAs but every time I investigate I don't see a benefit for me.)

You have to consider where else you would put the money. A deductible IRA is great if you can get one, but if that's not an option you'll often be better off putting your money in a Roth IRA than a taxable account. If you invest outside of your IRA you'll be paying taxes on dividends and capital gains every year, at least until you retire and go down into the 15% or lower tax bracket. If that money is in a Roth IRA instead, you'll never pay tax on it again as long as you wait until age 60 to remove the gains. You'll have to weigh the pros and cons for your particular situation, but you may find that a Roth IRA is a great option for part of your money.

grenzbegriff

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #68 on: December 02, 2015, 04:19:05 PM »
Wow, thanks everyone!

Yes, Cheddar Stacker, in 2014 I paid $12k in california state income tax, so I might be able to get ~$2k back if I amend the tax return.  I think I'll try doing it myself, I may as well learn how this stuff works.

I only paid $3k state tax in 2013 and very little before that, so I don't think those years are worth investigating.  (No significant charitable giving or any sort of spending in those years either.)

seattlecyclone, thanks for the suggestion about the backdoor Roth IRA.  I don't have any IRAs right now.  The reason I brought this up now is so I have time to make changes before the year is up.  It looks like I can put $5500 into a traditional IRA and then move it to a Roth IRA.  I use vanguard, so I'll do it there. 

Edit: I'm reading this thread about withdrawing from the Roth IRA tax free.   Sorry for asking questions that are already answered.
« Last Edit: December 02, 2015, 04:22:46 PM by grenzbegriff »

MDM

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #69 on: December 02, 2015, 04:53:32 PM »
... in 2014 I paid $12k in california state income tax, so I might be able to get ~$2k back if I amend the tax return.  I think I'll try doing it myself, I may as well learn how this stuff works.
Just curious: how was the original 2014 return done - by a CPA, or by software (which?), or by yourself, or...?  And was there a conscious decision to take standard vs. itemized?

grenzbegriff

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #70 on: December 02, 2015, 05:08:32 PM »
I used TurboTax.  I made the decision to take standard deduction, not realizing that state income tax was deductible.  (So I thought my total itemized deduction would have been close to $0.)

It could be surprising that TurboTax didn't make it completely obvious to me that this was the wrong choice.

MDM

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #71 on: December 02, 2015, 05:18:15 PM »
It could be surprising that TurboTax didn't make it completely obvious to me that this was the wrong choice.
Obviousness can be in the eye of the beholder.  If you go back through your 2014 TurboTax, do you get a screen similar to the one below?

« Last Edit: November 01, 2019, 03:43:13 AM by MDM »

grenzbegriff

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #72 on: December 03, 2015, 08:56:30 AM »
Looking back at my tax return, it looks like I misremembered taking the standard deduction.  I did take the itemized deduction of $12k in 2014.  So there was no problem with turbotax -- just me remembering the wrong thing and not checking. 

TomTX

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #73 on: December 05, 2015, 05:30:28 AM »
Looking back at my tax return, it looks like I misremembered taking the standard deduction.  I did take the itemized deduction of $12k in 2014.  So there was no problem with turbotax -- just me remembering the wrong thing and not checking.

Go back and check 2012 now - you are getting close to the deadline for filing an amended return if you did take the standard deduction for that one. 2013 and 2014 have plenty of time left.

deeshen13

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #74 on: December 09, 2015, 08:15:07 AM »
I don't want to start a new thread for this simple question, but it seemed apropos to ask here (and I received help with a n00b question early here).

In early retirement, with regards to qualified dividends, there's a lot of emphasis on keeping income in the 10/15% income tax bracket, so the qualified dividends are taxed at 0%.  As a single individual, that means if you have no other income, you can earn $37,450+6300+4000=$47,750 in qualified dividends annually and pay no taxes on them.  Pretty sweet.

My question is if you earn say 50k in qualified dividends (and move into the 25% income tax bracket), does all 50k of qualified dividends now get taxed at 15% or just (50,000-47,750) the $2250 above the threshold.  I would have to presume it's the latter, correct?

johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #75 on: December 09, 2015, 08:26:59 AM »
I don't want to start a new thread for this simple question, but it seemed apropos to ask here (and I received help with a n00b question early here).

In early retirement, with regards to qualified dividends, there's a lot of emphasis on keeping income in the 10/15% income tax bracket, so the qualified dividends are taxed at 0%.  As a single individual, that means if you have no other income, you can earn $37,450+6300+4000=$47,750 in qualified dividends annually and pay no taxes on them.  Pretty sweet.

My question is if you earn say 50k in qualified dividends (and move into the 25% income tax bracket), does all 50k of qualified dividends now get taxed at 15% or just (50,000-47,750) the $2250 above the threshold.  I would have to presume it's the latter, correct?

The latter.

As a side note, to be even more efficient, if your only reported income is a tIRA conversion and ltcg /qdi you could convert $10300 from a traditional to a Roth and have $37450 in ltcg /qdi and pay nothing in tax.

deeshen13

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #76 on: December 09, 2015, 03:42:53 PM »
Awesome, thanks johnny.  Your suggestion sounds like the golden goose, love it!

johnny847

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #77 on: December 09, 2015, 08:51:58 PM »
Awesome, thanks johnny.  Your suggestion sounds like the golden goose, love it!

Haha I learned of the idea from Jeremy over at GoCurryCracker.

I'd wager that this has been linked before in this thread, but I'm too lazy to go back and check

freedom8991

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #78 on: January 23, 2016, 09:46:38 AM »
Thank you for putting this together!

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #79 on: January 23, 2016, 10:02:48 AM »
Following.  Thanks, CS and others.

JustGettingStarted1980

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #80 on: October 27, 2016, 10:35:13 AM »
Ok Tax Maestros, I got another quick question.

My wife makes $20000/year, she contributes $18000 directly to a 401K she has access to.
We contribute to Roth IRA's, and since she has worked less this year due to our childcare needs,  she has made less income. Together our income is over 200K.

My question is, how much can she contribute to a Backdoor Roth IRA in 2016? Is it the $2000 difference between W2 income and 401K contribution? Or can we contribute the max of $5500 for her?

It makes sense that it would only be the $2000, but I've been wrong too many times before to trust "common sense".

Thanks,

JGS
« Last Edit: October 27, 2016, 02:22:00 PM by JustGettingStarted1980 »

seattlecyclone

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #81 on: October 27, 2016, 11:26:42 AM »
Ok Tax Maestro's, I got another quick question.

My wife makes $20000/year, she contributes $18000 directly to a 401K she has access to.
We contribute to Roth IRA's, and since she has worked less this year due to our childcare needs,  she has made less income. Together our income is over 200K.

My question is, how much can she contribute to a Backdoor Roth IRA in 2016? Is it the $2000 difference between W2 income and 401K contribution? Or can we contribute the max of $5500 for her?

It makes sense that it would only be the $2000, but I've been wrong too many times before to trust "common sense".

Thanks,

JGS

Traditional 401(k) contributions are excluded from your income before the W-2 and therefore don't count toward your MAGI for IRA contribution purposes. Roth 401(k) contributions do count as compensation.

Do be aware that there's a "spousal IRA" rule that allows each spouse to make a full $5,500 IRA contribution if the sum of their countable compensation is at least $11,000. If you're still working and earned at least $9,000 that shows up on your W-2, you should both be able to make full IRA contributions.

JustGettingStarted1980

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #82 on: October 27, 2016, 02:24:30 PM »
Thanks Seattle Cyclone, once again you've helped me out. Now I have to scrounge up the money to fund it!

brad0247

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #83 on: February 04, 2017, 10:46:31 PM »
In 2015 forego charitable contributions and paying your real estate tax bill. In January 2016, pay your 2015 RE tax bill and make your 2015 charitable contributions. Then in December 2016, pay your 2016 RE tax bill and make your 2016 charitable contributions. The result can be a nice way to squeeze out an extra $1,000-2,000 in deductions.

I thought you had to make your charitable contributions by end of year. For example, all contributions for 2016 need to have been made by December 31, 2016.

Source: https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions

MDM

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #84 on: February 04, 2017, 11:58:29 PM »
I thought you had to make your charitable contributions by end of year. For example, all contributions for 2016 need to have been made by December 31, 2016.
That's correct, if you want to count them in that year.  But you need to put CS's suggestion in context:
Quote
If you are close to the top of the standard deduction, consider intentionally lumping expenses into one year. In 2015 forego charitable contributions and paying your real estate tax bill. In January 2016, pay your 2015 RE tax bill and make your 2015 charitable contributions. Then in December 2016, pay your 2016 RE tax bill and make your 2016 charitable contributions. The result can be a nice way to squeeze out an extra $1,000-2,000 in deductions.

E.g., take a single person paying $5150 in mortgage interest, with a summer property tax bill of $300 and a winter property tax bill (payable any time between Dec. and Feb.) of $500.  Charitable contributions are $250, usually made in a lump sum in December. 

If those are all done annually, the total of $6200 does not exceed the standard deduction (of $6300) so there is no point itemizing.

Instead, one could have a year in which the mortgage and summer tax bill ($5150 + $300) are the only payments.  The $6300 standard deduction is taken.  The next year, both winter tax bills are paid (e.g., one in Jan. and the other in Dec.), plus a "double" charitable contribution of $500 is made.  Now the itemized total is $5150 + $300 + 2*$500 + 2*$250 = $6950 and the itemized deduction is taken.

TomTX

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #85 on: February 05, 2017, 05:48:51 AM »
In 2015 forego charitable contributions and paying your real estate tax bill. In January 2016, pay your 2015 RE tax bill and make your 2015 charitable contributions. Then in December 2016, pay your 2016 RE tax bill and make your 2016 charitable contributions. The result can be a nice way to squeeze out an extra $1,000-2,000 in deductions.

I thought you had to make your charitable contributions by end of year. For example, all contributions for 2016 need to have been made by December 31, 2016.

Source: https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions

Go re-read what he wrote. Pretend the writer normally gives to charity just after Christmas. All the charitable contributions are in 2016.  What would normally be the "2015" charitable contributions were actually given in January 2016. The "2016" contributions were given in December 2016.

From the charity's point of view, it's a 1-week shift in timing. To the IRS, the deductions are all lumped into the 2016 tax year.

simonsez

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #86 on: July 07, 2017, 03:36:35 PM »
Pre-Tax Deductions: As you’ll see in the links provided above and below, there are many deductions you can take before income is ever taxed. These deductions can include 401(k)/403(b)/457(b), Health/Dental Insurance, Cafeteria Plan, and Health Savings Account, among others. Some of these items reduce the FICA wage base as well, and they are the only available deductions against Social Security and Medicare Tax. All of these deductions reduce the income you are required to input on your tax return. Therefore, they all reduce your AGI, MAGI, taxable income, and tax, and they should be maximized whenever possible in most cases.

Can you expand on this at all as it pertains to FICA?  Specifically, how do you reduce the FICA wage base?  In looking at my W2 from last year, I see that my S.S. (Box 3, I did not make more than 127k or whatever the upper limit was) and Medicare wages (Box 5) were the amounts you would get if you added back my traditional 401k contributions.  That is to say, the SS Income/Medicare Income was higher than my wages reported in Box 1 and contributing to my 401k did not lower the FICA wage base. 

I don't have a Cafeteria Plan or access to an HSA so maybe it is unattainable for me to lower my FICA wage base.

Side note: if there are ways to avoid income being in the FICA wage base, it would help high earners* reduce the amount of Additional Medicare tax (extra 0.9% on all wages past 200k) that would be deducted.

*-provided the Cafeteria Plan, if used, is not overly favorable toward highly compensated employees as then the CP bennies would be treated as income, defeating the whole purpose.

MDM

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #87 on: July 07, 2017, 04:16:59 PM »
Pre-Tax Deductions: As you’ll see in the links provided above and below, there are many deductions you can take before income is ever taxed. These deductions can include 401(k)/403(b)/457(b), Health/Dental Insurance, Cafeteria Plan, and Health Savings Account, among others. Some of these items reduce the FICA wage base as well, and they are the only available deductions against Social Security and Medicare Tax. All of these deductions reduce the income you are required to input on your tax return. Therefore, they all reduce your AGI, MAGI, taxable income, and tax, and they should be maximized whenever possible in most cases.

Can you expand on this at all as it pertains to FICA?  Specifically, how do you reduce the FICA wage base?  In looking at my W2 from last year, I see that my S.S. (Box 3, I did not make more than 127k or whatever the upper limit was) and Medicare wages (Box 5) were the amounts you would get if you added back my traditional 401k contributions.  That is to say, the SS Income/Medicare Income was higher than my wages reported in Box 1 and contributing to my 401k did not lower the FICA wage base. 

I don't have a Cafeteria Plan or access to an HSA so maybe it is unattainable for me to lower my FICA wage base.

Side note: if there are ways to avoid income being in the FICA wage base, it would help high earners* reduce the amount of Additional Medicare tax (extra 0.9% on all wages past 200k) that would be deducted.

*-provided the Cafeteria Plan, if used, is not overly favorable toward highly compensated employees as then the CP bennies would be treated as income, defeating the whole purpose.
See Box 1—Wages, tips, other compensation and Box 3 and Box 5 as well.

Some common contributions not counted in the FICA wage base:
Pretax Health Ins.
Pretax Vision/Dental Ins.
Healthcare Flex Savings Acct. (FSA)
Daycare FSA
Employer-sponsored HSA
Pretax Commuter costs

Some common contributions that do count in the FICA wage base:
401(k) / 403(b) / TSP / etc.
457 plans   
Personal HSA

Array

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #88 on: March 02, 2018, 10:40:11 AM »
Quote
One side note on this credit – the instructions are very clear that if you have two kids, but only one of them is in daycare, you can claim both of the kids on this form opening up the full 6,000 in expenses and potentially doubling the credit.

Is this still valid? I could not find anything explicitly noting this from the IRS link.

seattlecyclone

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #89 on: March 02, 2018, 10:46:04 AM »
From the instructions:

Quote
To qualify for the credit, you must have one or more qualifying persons. You should show the expenses for each child in column (c) of line 2. However, it is possible a qualifying child could have no expenses and a second child could have expenses exceeding $3,000. You should list -0- for the one child and the actual amount for the second child. The $6,000 limit would still be used to compute your credit unless you have already excluded or deducted, in Part III, certain dependent care benefits paid to you (or on your behalf) by your employer.

K-12FI

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #90 on: March 06, 2018, 08:24:20 AM »
Was on reddit; wondering how some here thought on the following:

Quote
Consider the following:

You are married, making 50K a year, with spouse at home with child.

You would have a $24,000 standard deduction, bringing taxable income (before healthcare premiums) to $26,000. the first 19,050 is taxed at 10%, for a total of $1,905. The next $6,950 is taxed at 12%, for $834 of liability, making a total of $2,739 in tax liability if you use no traditional.

Now, let's take this further:

Remember that the Child Tax Credit is $2,000. So the entire $1,905 of tax liability is covered. In addition, $95 of tax liability at 12% comes out to an additional $791.

So, after all is said and done, you have the following tax free (federal) space:

$24,000+$19,050+$791= $43,841 of federal tax free space. So your goal should be to get your AGI DOWN to this number, then use the rest of your investing space for Roth.

Let's say your living expenses come out to $24,000. That means you can contribute up to $19841 to Roth with no federal tax implications today.

In this case, I could contribute $11,000 to a Roth IRA, and 8841 to a Roth 401K. Any additional income for investing ($50,000-$43841, or $6159) should be contributed to the Trad 401k, to bring your AGI down to the $43841.

Hope this makes sense!

I've always seen the Roth Sucks by GCC, and why Roth is better by Mad Fientist, but this viewpoint just really confused me: Am I missing something?

secondcor521

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #91 on: March 06, 2018, 08:55:00 AM »
Was on reddit; wondering how some here thought on the following:

Quote
Consider the following:

You are married, making 50K a year, with spouse at home with child.

You would have a $24,000 standard deduction, bringing taxable income (before healthcare premiums) to $26,000. the first 19,050 is taxed at 10%, for a total of $1,905. The next $6,950 is taxed at 12%, for $834 of liability, making a total of $2,739 in tax liability if you use no traditional.

Now, let's take this further:

Remember that the Child Tax Credit is $2,000. So the entire $1,905 of tax liability is covered. In addition, $95 of tax liability at 12% comes out to an additional $791.

So, after all is said and done, you have the following tax free (federal) space:

$24,000+$19,050+$791= $43,841 of federal tax free space. So your goal should be to get your AGI DOWN to this number, then use the rest of your investing space for Roth.

Let's say your living expenses come out to $24,000. That means you can contribute up to $19841 to Roth with no federal tax implications today.

In this case, I could contribute $11,000 to a Roth IRA, and 8841 to a Roth 401K. Any additional income for investing ($50,000-$43841, or $6159) should be contributed to the Trad 401k, to bring your AGI down to the $43841.

Hope this makes sense!

I've always seen the Roth Sucks by GCC, and why Roth is better by Mad Fientist, but this viewpoint just really confused me: Am I missing something?

Not sure what you're missing.  The example is a fairly simple scenario, so IRL your situation is probably a little bit more complicated, but the concept behind it is sound.

The child in this scenario would have to be under 17 at the end of the tax year.  That is an unstated assumption.  Also having a Roth 401k available is assumed.

Basically, the $24,000 standard deduction erases that much from income.  The $2,000 child tax credit erases the additional ~$20K of income because it's mostly taxed at about 10%:  $2,000/~10% = $20,000.

The next step that they didn't really explain is that if your marginal income tax rate is 0%, then you want to contribute to a Roth.  Earning income at a 0% rate then putting it in a Roth means completely tax free income.

The contributions to a traditional IRA are just to get the AGI down to where one is in a zero percent marginal bracket.

Actually, the hypothetical family would also probably qualify for the Retirement Savings Tax Credit, which would raise that ~$44K to about ~$46K because the RSTC is 10% of the first $2K at that income level IIRC.

dandarc

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #92 on: March 06, 2018, 08:58:47 AM »
Was on reddit; wondering how some here thought on the following:

. . . snip . . .

I've always seen the Roth Sucks by GCC, and why Roth is better by Mad Fientist, but this viewpoint just really confused me: Am I missing something?
Long story short - if your marginal tax rate is 0%, then Roth is the obvious choice.

Kind of a detailed scenario of just how high your "income" can be and still get a 0% marginal tax.

It ignore's the savers credit, although with the new things around the child tax credit and what is refundable and what isn't, I'm not as confident how that will intersect.  The other thing is - a portion of the child tax credit is refundable, so saying the $2,000 credit "covers" the tax on the 10% bracket + a little is not entirely true - your income tax can go negative, and likely would if you further reduced taxable income.  I'd think with numbers like this, you could potentially get your income down to the 50% saver's credit, which would 0 out your tax liability before refundable credits + get you the full refundable portion of the child tax credit.  Maybe the EITC factors in too.  Marginal rates at lower incomes can be shockingly high when you factor in everything. 

Basically, I'm not sure the analysis is complete and 100% correct, but the idea is definitely down the right track as to where Roth is clearly the way to go - once there is no tax savings to be had, Roth beats Traditional hands down.

seattlecyclone

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #93 on: March 06, 2018, 09:03:54 AM »
Was on reddit; wondering how some here thought on the following:

Quote
Consider the following:

You are married, making 50K a year, with spouse at home with child.

You would have a $24,000 standard deduction, bringing taxable income (before healthcare premiums) to $26,000. the first 19,050 is taxed at 10%, for a total of $1,905. The next $6,950 is taxed at 12%, for $834 of liability, making a total of $2,739 in tax liability if you use no traditional.

Now, let's take this further:

Remember that the Child Tax Credit is $2,000. So the entire $1,905 of tax liability is covered. In addition, $95 of tax liability at 12% comes out to an additional $791.

So, after all is said and done, you have the following tax free (federal) space:

$24,000+$19,050+$791= $43,841 of federal tax free space. So your goal should be to get your AGI DOWN to this number, then use the rest of your investing space for Roth.

Let's say your living expenses come out to $24,000. That means you can contribute up to $19841 to Roth with no federal tax implications today.

In this case, I could contribute $11,000 to a Roth IRA, and 8841 to a Roth 401K. Any additional income for investing ($50,000-$43841, or $6159) should be contributed to the Trad 401k, to bring your AGI down to the $43841.

Hope this makes sense!

I've always seen the Roth Sucks by GCC, and why Roth is better by Mad Fientist, but this viewpoint just really confused me: Am I missing something?

The reasoning behind the "Roth sucks" posts is pretty simple: when you have a choice, you should choose to pay tax when your marginal tax rate is lower rather than higher. Most Mustachian-type people with high savings rates will find that they spend less in retirement than they earn while working, often much less. Furthermore, any money that does come out of Roth or taxable accounts generally won't count as regular income, meaning that your tax bracket in retirement will be determined by some number less than your overall spending. These factors make it so that the default assumption should be for a lower marginal tax rate in retirement, making traditional the better default option unless you have crunched the numbers for your particular situation and know that you will have a taxable income high enough to push you into a higher bracket than currently.

One thing that the author may be missing here is that $1,400 of the child tax credit is refundable, meaning that it's possible to have a negative tax liability. Sure, you can get to zero exactly by bringing the AGI down to $43,841 (note: I haven't verified this number), but there's nothing magical about the zero point when it's possible to owe negative $1,400. In this case you still have a marginal tax rate of 10-12% even with an overall tax liability of zero.

That is a pretty low tax rate. Roth might be a better option for them here, but they would need to make that decision with some knowledge of what they predict their taxable income to be in retirement such that they might have a higher marginal rate. The fact that their tax liability is zero is not sufficient information to make that decision.

Radioherd88

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #94 on: February 11, 2019, 04:40:48 PM »


Traditional and Roth IRAs are another great tool to consider utilizing, and they are both good. A Traditional IRA contribution reduces your AGI and taxable income, a Roth contribution does not. A lot is said about both of these accounts all over this forum and the interwebs including a great analysis from The Mad Fientist. What you need to know for tax planning purposes is this: If you believe you will pay a higher tax rate in the future, go with Roth, and if you believe you will pay a lower tax rate in the future, go with Traditional. When you clear out all the other noise, this is really the only thing that matters. Most early retirees will benefit more from Traditional if they qualify (see the links to the IRS or key facts and figures for qualification), but this must be a case by case analysis.



Great post Cheddar - I’m stuck on whether contributing to a non deductible IRA or Roth is better than a straight Vanguard taxable fund? I'm not eligible for deductible IRA but it still has benefits.

I have my other tax advantaged accounts maxed but I need more of my funds to use before 59.5 so figure I can’t touch the IRA’s till then right? Or can I still access the “contributions” at any time from either IRA and just not the gains?

MDM

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #95 on: February 12, 2019, 11:50:37 AM »
Great post Cheddar - I’m stuck on whether contributing to a non deductible IRA or Roth is better than a straight Vanguard taxable fund? I'm not eligible for deductible IRA but it still has benefits.
For all three:
a) non-deductible tIRA
b) Roth IRA
c) taxable account
the contribution is made with after-tax dollars.

Assuming the investment grows in value, Roth is the only one with no (under current law) possibility of tax on earnings.

Quote
I have my other tax advantaged accounts maxed but I need more of my funds to use before 59.5 so figure I can’t touch the IRA’s till then right? Or can I still access the “contributions” at any time from either IRA and just not the gains?
See How to withdraw funds from your IRA and 401k without penalty before age 59.5.

Radioherd88

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #96 on: February 13, 2019, 10:43:25 AM »
Great post Cheddar - I’m stuck on whether contributing to a non deductible IRA or Roth is better than a straight Vanguard taxable fund? I'm not eligible for deductible IRA but it still has benefits.
For all three:
a) non-deductible tIRA
b) Roth IRA
c) taxable account
the contribution is made with after-tax dollars.

Assuming the investment grows in value, Roth is the only one with no (under current law) possibility of tax on earnings.


That was my initial thinking too (hence my converting the non deductible tIRA) last year, but then i read somewhere else that the non deductible IRA still had some benefits to make it better than the taxable account (dividends not taxed or something)?

Anyways, regardless of non deductible IRA vs taxable account, Roth is still the clear winner, especially if doing a conversion ladder to use it before 59.5?

Thanks


MDM

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #97 on: February 13, 2019, 11:03:53 AM »
That was my initial thinking too (hence my converting the non deductible tIRA) last year, but then i read somewhere else that the non deductible IRA still had some benefits to make it better than the taxable account (dividends not taxed or something)?
While the money stays within the IRA, gains are not taxed.  But when gains are withdrawn, they are taxed at ordinary income rates.  Ordinary income rates are higher than the Long Term Capital Gain and Qualified Dividend (LTCG & QD) rates that can apply to a taxable account.

Quote
Anyways, regardless of non deductible IRA vs taxable account, Roth is still the clear winner,
Yes.

Quote
especially if doing a conversion ladder to use it before 59.5?
Don't understand this part of the question.

Radioherd88

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #98 on: February 13, 2019, 02:50:49 PM »

Quote
especially if doing a conversion ladder to use it before 59.5?
Don't understand this part of the question.
[/quote]

Basically my main reservation with the roth was that it would tie the money up until 59.5 so i was thinking normal taxable was better for this reason

MDM

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Re: The Mustache Tax Guide (U.S. Version)
« Reply #99 on: February 13, 2019, 02:59:07 PM »
Roth contributions are withdrawable at any time, for any reason, without tax or penalty.

Yes, Roth earnings withdrawn prior to age 59.5 may be liable for both tax and penalty.

 

Wow, a phone plan for fifteen bucks!