The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: YTProphet on March 03, 2015, 11:13:18 AM
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So I make around $125,000 and my SO doesn't work (no child care deductions/credits there). I have three kids. I'm maxing out my 401k, my Roth as well as my wife's, and we give a fair bit to charity (around $6,000/year). We still carry a mortgage and pay a fair bit in property taxes. All that combined, we usually end up itemizing. However, I'll still end up paying probably $7-8k in federal taxes this year.
Does anyone have any ideas I might not be thinking of as far as further reducing my federal tax bill?
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tIRA rather than Roth if you can get your income for that measure below the $98k, which you're not ridiculously far from.
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tIRA rather than Roth if you can get your income for that measure below the $98k, which you're not ridiculously far from.
If we contribute to standard IRAs and not Roths, then we can deduct an additional $11,000? I assume that if we roll it over to a Roth immediately then it'll be taxed since it was a deductible contribution?
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Do you have a high-deductible health plan available? If so, you can shelter another $6,650/year tax-free in an HSA.
Do you have taxable investments? If you give some of them to your kids (through an UTMA account or similar), each kid can recognize up to $2k of investment income per year at their own tax rate (often 0% for dividends and long-term gains) instead of at your higher tax rate.
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Just filed to get $1650 back on our federal return (we're in the 15% bracket) by doing just that with $11,000. There is some kind of upper limit of around $98k in income, but I don't know what comes out before you calculate which side of $98k you're on. You have until April 15th to do that and characterize the contribution as being for 2014 (in Schwab where I did it the contribution year was just a part of the transfer form). I would think recharacterizing it as a Roth would not work. However, each person can contribute a maximum of $5500 to Roth OR to tIRA. You might be able to recharacterize the Roth contributions you already made.
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Do you have a high-deductible health plan available? If so, you can shelter another $6,650/year tax-free in an HSA.
Do you have taxable investments? If you give some of them to your kids (through an UTMA account or similar), each kid can recognize up to $2k of investment income per year at their own tax rate (often 0% for dividends and long-term gains) instead of at your higher tax rate.
I do but I'm sticking with a different plan this year since we both need expensive procedures done. I think I'll switch back to high deductible next year, although there may only be an FSA option here and not HSA.
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Do you have a high-deductible health plan available? If so, you can shelter another $6,650/year tax-free in an HSA.
Do you have taxable investments? If you give some of them to your kids (through an UTMA account or similar), each kid can recognize up to $2k of investment income per year at their own tax rate (often 0% for dividends and long-term gains) instead of at your higher tax rate.
If you're putting $6,650/yr into an HSA and aren't spending it all, would you just withdraw it and pay tax at retirement, or how's that work?
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If you're putting $6,650/yr into an HSA and aren't spending it all, would you just withdraw it and pay tax at retirement, or how's that work?
Yes. In fact, if you're maxing out all of your tax-advantaged contributions, the optimal thing to do is to spend none of your HSA money while you're working and instead pay medical bills out of post-tax funds. You can save your receipts and "reimburse" yourself out of the HSA tax-free at any time after you retire. And if you make it to 65 without using up your HSA on medical expenses, you can withdraw the funds and only pay regular income tax on that money (no extra penalties after 65).
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If you're putting $6,650/yr into an HSA and aren't spending it all, would you just withdraw it and pay tax at retirement, or how's that work?
Yes. In fact, if you're maxing out all of your tax-advantaged contributions, the optimal thing to do is to spend none of your HSA money while you're working and instead pay medical bills out of post-tax funds. You can save your receipts and "reimburse" yourself out of the HSA tax-free at any time after you retire. And if you make it to 65 without using up your HSA on medical expenses, you can withdraw the funds and only pay regular income tax on that money (no extra penalties after 65).
So, it turns into a 401k when you turn 65, effectively?
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If you're putting $6,650/yr into an HSA and aren't spending it all, would you just withdraw it and pay tax at retirement, or how's that work?
Yes. In fact, if you're maxing out all of your tax-advantaged contributions, the optimal thing to do is to spend none of your HSA money while you're working and instead pay medical bills out of post-tax funds. You can save your receipts and "reimburse" yourself out of the HSA tax-free at any time after you retire. And if you make it to 65 without using up your HSA on medical expenses, you can withdraw the funds and only pay regular income tax on that money (no extra penalties after 65).
So, it turns into a 401k when you turn 65, effectively?
Yep - it is often called the stealth IRA.
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If you're putting $6,650/yr into an HSA and aren't spending it all, would you just withdraw it and pay tax at retirement, or how's that work?
Yes. In fact, if you're maxing out all of your tax-advantaged contributions, the optimal thing to do is to spend none of your HSA money while you're working and instead pay medical bills out of post-tax funds. You can save your receipts and "reimburse" yourself out of the HSA tax-free at any time after you retire. And if you make it to 65 without using up your HSA on medical expenses, you can withdraw the funds and only pay regular income tax on that money (no extra penalties after 65).
So, it turns into a 401k when you turn 65, effectively?
The Mad Fientist gives the best description of HSAs that I've seen:
http://www.madfientist.com/ultimate-retirement-account/
Bottom line is yes, once you're above retirement age if you don't have qualified medical expenses then HSAs behave like traditional 401ks/IRAs
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If you're putting $6,650/yr into an HSA and aren't spending it all, would you just withdraw it and pay tax at retirement, or how's that work?
Yes. In fact, if you're maxing out all of your tax-advantaged contributions, the optimal thing to do is to spend none of your HSA money while you're working and instead pay medical bills out of post-tax funds. You can save your receipts and "reimburse" yourself out of the HSA tax-free at any time after you retire. And if you make it to 65 without using up your HSA on medical expenses, you can withdraw the funds and only pay regular income tax on that money (no extra penalties after 65).
So, it turns into a 401k when you turn 65, effectively?
The Mad Fientist gives the best description of HSAs that I've seen:
http://www.madfientist.com/ultimate-retirement-account/
Bottom line is yes, once you're above retirement age if you don't have qualified medical expenses then HSAs behave like traditional 401ks/IRAs
Why the hell am I contributing to my Roth instead, then?
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Why the hell am I contributing to my Roth instead, then?
Because you didn't know any better? :-)
Now you do. Knowledge is power. Use it wisely.
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Why the hell am I contributing to my Roth instead, then?
Reasons this might be valid:
1. Your taxable income is already low - not as much (possibly no) tax to save today.
2. Along the lines of # 1 - If you can't make HSA donations through your employer's payroll, you don't save FICA as well.
3. Shitty HSA - high fees / bad investment choices (some are little more than a high-fee checking accounts). Although I think if this is the case you could just get a different HSA.
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http://www.nolo.com/legal-encyclopedia/why-its-tax-smart-hire-your-children.html (http://www.nolo.com/legal-encyclopedia/why-its-tax-smart-hire-your-children.html)
This is something my parents always did. Of course for this option you would need to have your own business. Sometimes I would get a raise because the money could either go to taxes or me and my siblings. That was a pretty good deal for everyone.
Otherwise the tIRA and HSA are your best bets.
I do but I'm sticking with a different plan this year since we both need expensive procedures done. I think I'll switch back to high deductible next year, although there may only be an FSA option here and not HSA.
You might want to do the math on this. For me I come out ahead with an HSA unless I spend between $3,500 and $5,000 on medical expenses. Anything above or below this range and I come out ahead with the HSA option.
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You can do some solar updates to your home and get a federal tax rebate as well.
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So I make around $125,000 and my SO doesn't work (no child care deductions/credits there). I have three kids. I'm maxing out my 401k, my Roth as well as my wife's, and we give a fair bit to charity (around $6,000/year). We still carry a mortgage and pay a fair bit in property taxes. All that combined, we usually end up itemizing. However, I'll still end up paying probably $7-8k in federal taxes this year.
Does anyone have any ideas I might not be thinking of as far as further reducing my federal tax bill?
You may want to take a look at going on/off for your standard deduction. If the charities you support can withstand a lean period, and you can pay your property taxes twice in a year (as an example, in January and then in December of the same calendar year), you may be better off cramming as many of your itemized deductions into one year and then taking the standard deduction in the next. That'd mean 1/2 the time your mortgage interest would be after-tax, but if you add up the total deductions for two years (one year of supercharged itemized, including 2x your $6K to charities, + one year of the standard deduction) versus 2x your current itemized deduction, and the former is bigger, you'd be better off.
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These are all good ideas, but I'd also remember that you're only paying 6% of your income in federal taxes right, which is a pretty good deal. So it's not like you stand to save a huge amount more, because there's not that much more to save.
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So I make around $125,000 and my SO doesn't work (no child care deductions/credits there). I have three kids. I'm maxing out my 401k, my Roth as well as my wife's, and we give a fair bit to charity (around $6,000/year). We still carry a mortgage and pay a fair bit in property taxes. All that combined, we usually end up itemizing. However, I'll still end up paying probably $7-8k in federal taxes this year.
Does anyone have any ideas I might not be thinking of as far as further reducing my federal tax bill?
$125K (gross income) - $18K (401k) = $107K. That puts you ~midway through the IRA deduction phase-out for MFJ so you could be making some deductible Traditional IRA contributions.
See "IRA Deduction Worksheet—Line 32" in http://www.irs.gov/pub/irs-pdf/i1040gi.pdf.
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These are all good ideas, but I'd also remember that you're only paying 6% of your income in federal taxes right, which is a pretty good deal. So it's not like you stand to save a huge amount more, because there's not that much more to save.
Well, it's 6%, plus FICA. Let's not pretend that FICA isn't a tax :) So even if he completely eliminated his Federal Income Tax liability, he'd be going from 13.5% down to 7.5% (or so).
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That and here is a post form RootofGood http://rootofgood.com/make-six-figure-income-pay-no-tax/. They made $150K and paid like $100 in taxes.
There are lots of ways to skin this cat. Keep your thinking cap on but also don't be afraid to just earn an extra 5K (4% increase?) this year.
The HSA is great as well.
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Definitely switch to traditional contributions, no more Roth's please. (I am a CPA). Lower your AGI, also you can contribute on behalf of your wife, a spousal IRA, $5500 per year, do this all pre tax, it's much easier to fund and your net will be higher in early retirement, than a Roth.
"Your best Roth is simply to invest in taxable accounts and harvest gains at 0%" (source: myself)