Balancing "Buckets" In Accumulation Phase With Side Business

[mr_orange]

My wife and I each have full time W2 jobs and run some side real estate businesses.  Given our entity structuring it is not efficient from a current-year tax standpoint for us to make contributions to a SoloK.  The SoloK also does not allow us to make Roth contributions.  Right now we max out our Roth 401(k) contributions via our employer at $18k each.

I was wondering how we may improve our future tax planning given these constraints.  One idea would be to fund our SoloK anyway to increase the money that can be invested passively on a tax-deferred basis.  The problem is that this will actually INCREASE our current-year taxes, which doesn't seem like a smart thing to do. 

We can make greater than 20% on our business investments and have historically made much more than this.  This activity is not passive and thus would be disallowed for a self-directed investment because we'd be providing an outside benefit to the IRA.  Anything invested outside of retirement plans will have much greater yields, will require active management from us, and will deliver after-tax income. 

Any thoughts about how to manage current-year taxes and provide for investments that can be passively managed while also funding more each year?  Here are likely stats for 2015:

-W2 Jobs - $200k or so
-Business Profits - $400k or so (2016 likely to be about the same)
-Assume $500k or so is available to invest, save, etc. 

Goals:
-Minimize taxes over the long run.  In other words, get more in the tax-deferred vehicles to help with future year taxes
-Maximize after-tax income (not minimize taxes necessarily)
-Avoid paying more in current year taxes

Any thoughts? 

[Exflyboy]

So you make $600k a year?

Why might I ask are you making ROTH 401k contributions.. Can you not make traditional 401k contributions and reduce your taxable income by $18k each (unless your over 50. when its $24k each I think)?

At $600k income you going to be paying high rate in tax, and your 401k would "un" taxed at the highest rate of course.

What am I missing?.. are you expecting to be in a high tax bracket when you retire?..

[mr_orange]

So you make $600k a year?

That is what we expect to make in 2015....yes.

Why might I ask are you making ROTH 401k contributions.. Can you not make traditional 401k contributions and reduce your taxable income by $18k each (unless your over 50. when its $24k each I think)?

At $600k income you going to be paying high rate in tax, and your 401k would "un" taxed at the highest rate of course.

What am I missing?.. are you expecting to be in a high tax bracket when you retire?..

Last year we paid about 17% effective tax rates after all of the tax shields, etc. were implemented, but we only made about $314k last year.  Our income will increase substantially in 2015 and we're forecasting our effective rate at more like 25% this year. 

I'm a bit torn about whether or not to contribute to a Roth or a traditional IRA.  I have been reading about the laddering to convert a traditional to a Roth, but it is unclear what my income will be post FI.  It is possible we'll be running our own businesses then without the need for a W2 and thus it is quite possible our tax rate may be higher.  A lot depends on what assumptions we'll make about income.  My hope is to do the same or fewer projects and simply own more equity in them and thus have more profits with less work and less risk. 

My bigger concern is figuring out how to make more contributions into tax-deferred accounts this year without having to pay more in taxes to do so. 

[waltworks]

You need a badass accountant/tax guy at this point. And you may just need to suck it up and pay up, honestly you just make a lot of money so you'll pay a lot in taxes. C'est la vie. It might be easier to sleep at night if you haven't implemented a bunch of shady tax avoidance strategies. Or if you really hate the taxman, maybe not.

I personally would not worry about it much. Effective 25% is nothing when you're making that kind of scratch. Sounds like the business is doing even better than you thought as of a few weeks ago, congrats!

-W

[mr_orange]

You need a badass accountant/tax guy at this point. And you may just need to suck it up and pay up, honestly you just make a lot of money so you'll pay a lot in taxes. C'est la vie. It might be easier to sleep at night if you haven't implemented a bunch of shady tax avoidance strategies. Or if you really hate the taxman, maybe not.

We have a great accountant.  He is changing firms and will be a partner at the new firm in 3-5 years.  I have referred a lot of clients to him and that has helped with his career.  So I get some special treatment ;-)

Yeah...I'm not into cutting corners on taxes.  Everything we do is kosher and we are running out of ways to reduce things.  The only thing that will really help going forward is extra passive losses through depreciation (paper) expenses, which will require a lot of cash relative to the benefit it provides.  Thus we're trying to maximize after-tax income instead of minimizing taxes. 

I personally would not worry about it much. Effective 25% is nothing when you're making that kind of scratch. Sounds like the business is doing even better than you thought as of a few weeks ago, congrats!

-W

The business is doing well.  We found more builders that can bring in our dates and thus some more product should sell in 2015.

Since taxes are my largest expense it definitely makes sense to spend a lot of time trying to optimize them instead of other small expenses right now. 

I am really more interested in comments related to whether or not I should re-characterize 401(k) dollars into traditional accounts instead of Roth accounts to save on taxes and if there are any clever ways to get more money in tax-deferred accounts.  The drag from taxes will increase in future years most likely.  Thus it may make sense to pay a bit more tax this year and sock away $106k in the SoloK accounts anyway, even though it will increase taxes a bit in this tax year.