Author Topic: how can we shelter more $ from taxes?  (Read 489 times)

freedom49

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how can we shelter more $ from taxes?
« on: January 29, 2019, 12:51:39 PM »
Hi,

My husband(51) earns 110k per year government employee.
He maxes out his deferred comp and has a pension that his employer contributes to.  He maxes out his ROTH. 
I (49) manage our 12 rental properties part time.  I net 65k per year after expenses.
I do not pay SS, should I?   I do contribute the max to a Roth IRA.

Is there another way to shelter any of our income?  We only need approximately 75k to live on so we save a lot in taxable accounts.  Is there already a posting on this? 

Thanks

terran

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Re: how can we shelter more $ from taxes?
« Reply #1 on: January 29, 2019, 02:20:32 PM »
Whether or not you should be paying self employment tax (employee and employer social security and medicare) depends on whether the real estate is an investment (schedule E) or a business (schedule C or other if incorporated). I believe there are very specific rules about this, but I'm not familiar with them. If you don't get an answer you might try posting a new thread with a title like "Is my real estate a business or investment for tax purposes?"

I think real estate has many tax deductions (depreciation and whatnot) that should be able to reduce much of that income. Again, I'm not really familiar with real estate, but many people on this forum are.

If it turns out your real estate is a business you could open a solo 401(k) or SEP IRA and defer much of your income.

You might be somewhat close to the limit, but if you don't participate in a retirement plan at work you should be able to contribute to a traditional IRA instead of Roth even though your husband does have a workplace retirement plan. This would get you a deduction. Your husband can't make deductible traditional IRA contributions. You can recharacterize your 2018 contribution any time before your tax filing deadline. See https://www.irs.gov/retirement-plans/ira-deduction-limits

Since your husband is over 50, if his deferred comp plan is a 401(k)/403(b)/457(b) he should be able to make an extra $6000 catch up contribution. See https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions

Since your husband is a government employee he may have access to multiple plan types. Having both a 401(k)/403(b) and a 457(b), which have separate contribution limits, is somewhat common.

Once you're 50 you'll be able to make an extra $1000 traditional IRA catch up contribution. It doesn't help with deferring income, but your husband can make the same catch up contribution to his Roth.

Also keep in mind that taxable investing can be quite tax efficient. See https://www.bogleheads.org/wiki/Tax-efficient_fund_placement


freedom49

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Re: how can we shelter more $ from taxes?
« Reply #2 on: January 29, 2019, 02:58:30 PM »
Thank you for all the good ideas.  I will double check all these ideas. 

He has a employer sponsored pension, deferred comp(457) and none of the others.  We do max out the Roths because our income is above the MFJ limits to contribute to tIRA, make extra contributions to both Roth and def comp since he is over 50.  Appreciate the the link to bogleheads site for investing wisely. 

I was wondering about making the real estate investments into a business and then opening a retirement plan like you said....solo 401k or SEP Ira?

I will try your idea about the post.  Thanks again

terran

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Re: how can we shelter more $ from taxes?
« Reply #3 on: January 29, 2019, 03:58:44 PM »
Just to confirm, is your Modified Adjusted Gross Income over $189k? If not you can contribute to a deductible IRA unless you get yourself a workplace retirement plan, but your husband can't. You want to look at the "married filing jointly with a spouse who is covered by a plan at work" entry at https://www.irs.gov/retirement-plans/plan-participant-employee/2018-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-not-covered-by-a-retirement-plan-at-work

Keep in mind that you'll have to pay self employment tax in addition to income tax if the rentals are classified as a business whether or not your contribute to a retirement plan, so being classified as investments is likely better. You might not have a choice though, depending on your circumstances.

As long as you don't plan to have any employees other than you or your spouse a solo 401(k) is usually better than a SEP because the contribution limits are higher at lower income (anything under around $225k net business income if memory serves). A solo 401(k) must be open by the end of the year for which you want to contribute (although you can contribute any time up until the tax filing deadline), so for 2018 you might want to open a SEP IRA, which you can do any time until the tax filing deadline, if you find your rentals are a business. You usually can't have both a SEP IRA and solo 401(k) open at the same time, except the Schwab SEP IRA (and possibly others) which can be open at the same time (having to do with how the plan documents are written), but even then the limits are combined, so it doesn't do you can good. If you open a SEP IRA and then switch to solo 401(k) you'll likely want to roll the SEP over to a regular IRA or into the Solo 401(k) (which some, but not all, custodians allow).