The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: rockstache on December 04, 2013, 07:24:57 AM
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Ever since I found MMM, I have been devouring financial knowledge and trying to read and learn everything I can. I have read tons of the boglehead stuff, but a lot of it is still really over my head. My question is about my specific scenario, and the best way to handle my money in order to minimize taxes. If anyone knows of a calculator that I can use, that would be really great too. My husband recently got a full time job (after being without one for a very long time, so I know this is going to have a large impact on things, and I want to catch it before it bites me).
Net Income:
Me: $682 weekly (plus $6700 one-time bonus)
Roth 401K per week (Just like a 401k except comes out after taxes): $137
Husband: $893 biweekly
401K per pay period $130
Medical/Dental comes out also, $76.96 per pay period
We are also each contributing to Roth IRAs, but they are only about 1/2 funded, and although I am doing my best, I am not sure that we will be able to fully fund them both before the period ends. My husband is not fully on board with mustachianism, so it is a one (wo)man effort at this point.
I was sitting with our HR lady the other day (small company, nice lady, but not really well versed in this stuff), and she suggested that I switch my 401K, or part of it, over to a standard 401K (pre-tax), so my paycheck would be larger. Now, I know that wouldn't necessarily be the right thing to do just to get a larger paycheck, but at the same time, I realized that we most likely have kicked ourselves up into the next tax bracket with my husband's new job.
So I guess my questions are:
Is there a calculator that would show me the advantage of having some of my money go into a 401K verses the Roth 401K when it comes to paying taxes?
and
Do any of you with more experience have any suggestions about allocating money for taxes given the numbers above?
We will not itemize, we don't own a house or have kids, and we are (no longer) students. DH is claiming M1 (married/one exemption) on his withholdings and I am claiming S1 (single/one exemption). I am afraid of not having enough money taken out and having to pay....I would rather get a refund even though it is a small loan to Uncle Sam.
Thanks for your help and for reading my long question!
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Do you guys file jointly or separately?
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We file jointly.
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Since you file jointly you will be in the 15% bracket, you would need to have a combined income of >$72.5k to move into the 25% bracket. Assuming your combined income is around $59k you haven't bumped yourself into a new tax bracket. The influence on the size of your paycheck from Roth to Traditional is rather small, however I do highly encourage using the traditional 401k for pre-tax contributions, madFientist put it best so I'll just link to his work (http://www.madfientist.com/traditional-ira-vs-roth-ira/).
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I realized that we most likely have kicked ourselves up into the next tax bracket with my husband's new job.
Perhaps. Looking at just your pay, I calculate your annual income to be $42,164. After subtracting the standard deduction of $12,200 and your two exemptions ($7,800), your taxable income is $22,164 less whatever pre-tax deductions you would've had. You show the medical/dental deductions from your husband's paycheck - I don't know what they would be if they came from yours, instead. The top of the 10% marginal bracket for 2013 is $17,850 taxable income for married filing jointly, so unless you would have had $4,314 in pre-tax deductions, you were probably in the 15% bracket all along. Your combined income is below the top of the 15% bracket ($72,500 in 2013). Also note that tax brackets are marginal - only the income in that "bucket" is taxed at that rate. If you have $30,000 in taxable income, the first $17,850 is taxed at 10% and the last $12,150 is taxed at 15%. The total tax is $3,067 for an effective rate of 12%.
It's actually not too hard to build a spreadsheet for tax-planning purposes. Mine's not really set up for sharing, but I just estimate my total compensation and expected taxable interest and dividends, then subtract out my pre-tax deductions (health care, tax-advantaged savings, etc) along with the standard or itemized deductions and exemptions. I use that to figure out whether it makes more sense to contribute to Roth or traditional retirement accounts in any given year.
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Our gross income with his new job is going to be about $100,295. (Approximately based on receiving the same bonus as last year.) Our previous income was about $70,000, so based on the gross amounts, I thought we would have jumped up. I didn't realize that that would be based on the adjusted amounts.
We can't take the medical deductions from my paycheck, as he works at a health insurance company, and one of the (enormous) benefits is cheaper insurance. If we did it through my company, it would be more than twice the cost.
Thanks for the link. I obviously have a lot of learning to do about finances in general and I will definitely need to look more into the Roth vs standard 401K. I kind of just assume that taxes will always go up, and I will eventually make more money than I do today, so I always thought Roth was best when it was an option. I will be sitting down to read that article now!
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Our gross income with his new job is going to be about $100,295. (Approximately based on receiving the same bonus as last year.) Our previous income was about $70,000, so based on the gross amounts, I thought we would have jumped up. I didn't realize that that would be based on the adjusted amounts.
That doesn't line up with the numbers you posted initially. If your total gross income is that high, you're probably very close to the top of the 15% bracket. Staying in that bracket by contributing to tax-deductible accounts makes a lot of sense.
We can't take the medical deductions from my paycheck, as he works at a health insurance company, and one of the (enormous) benefits is cheaper insurance. If we did it through my company, it would be more than twice the cost.
Yeah, I was just using that as an example - showing that you were probably in the 15% bracket no matter what. Based on the numbers you just posted, however, my advice is amended as above.
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Our gross income with his new job is going to be about $100,295. (Approximately based on receiving the same bonus as last year.) Our previous income was about $70,000, so based on the gross amounts, I thought we would have jumped up. I didn't realize that that would be based on the adjusted amounts.
That doesn't line up with the numbers you posted initially. If your total gross income is that high, you're probably very close to the top of the 15% bracket. Staying in that bracket by contributing to tax-deductible accounts makes a lot of sense.
Ok, I'm sorry....I'm not sure what I posted incorrectly in my first post, so I will post our GROSS income and try to explain what I meant.
Me: $1144 per week. My take home paycheck (after taxes/withholdings and my Roth 401K) is $682 per week.
Husband: $1307 biweekly. His take home paycheck (after taxes/withholdings and his 401K and medical/dental) is $893 biweekly.
Does that make more sense?
Thanks for all the help!
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Me: $1144 per week. My take home paycheck (after taxes/withholdings and my Roth 401K) is $682 per week.
Husband: $1307 biweekly. His take home paycheck (after taxes/withholdings and his 401K and medical/dental) is $893 biweekly.
Does that make more sense?
Sorry, just realized I missed the "net income" statement in your first post. I attached an Excel-based calculator to this post. It is macro-enabled because I use a function to calculate the amount of tax owed. If your taxable income is over $72,500 for 2013, you will save $0.25 in taxes for each dollar you contribute to a deductible retirement account (traditional 401(k) or traditional IRA).
You can also plug your information into the withholding calculator at irs.gov [link] (http://apps.irs.gov/app/withholdingcalculator/) to figure out your tax liability and how to configure your withholding to make sure you're not having too little withheld.
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Oh wow, thank you madage! That calculator is perfect. I can see that I will want to contribute enough to my traditional 401K to put me below the tax threshhold.
Thanks!
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Happy to help!
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thank you for this! i have the same problem.,
my husband doubled his income for this year which will move us up into a higher tax bracket, we dont have a house as a tax shelter, but have kids though. i wanted to contribute into my 401k to shelter some off towards taxes but we still need the money right now to pay off some huge student loan debt. about 60K.
if i have understood this correctly:
if our combined gross income is $155,000
and contributes to 401k to bring it down to less than $73,000 gross , are we gonna stay at the 15% income tax bracket?
is this by Gross or NET income by the way?
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if i have understood this correctly:
if our combined gross income is $155,000
and contributes to 401k to bring it down to less than $73,000 gross , are we gonna stay at the 15% income tax bracket?
is this by Gross or NET income by the way?
Tax brackets are determined by taxable income, which is adjusted gross minus deductions and exemptions. Taxable income is line 43 on form 1040, or cell B27 in the Excel workbook I attached earlier. If your combined gross income is $155,000, you need more than $80,000 in deductions to get down into the 15% bracket. You can't get there with just 401(k) contributions, which are limited to $17,500 per person in 2013 (unless you're over 50). Good luck.
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would this work if we have two 401K accounts at 17,000 contributions each, plus an IRA, so our taxable income will go down to 72K?
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would this work if we have two 401K accounts at 17,000 contributions each, plus an IRA, so our taxable income will go down to 72K?
I don't have all the numbers, but going with what you've provided:
$155,000 gross
- $35,000 two max 401(k) contributions
- $11,000 two max IRA contributions
- $12,200 standard deduction
$97,000
You can also take an exemption equal to $3,900 per person in your household but you'll still need a bunch of deductions (health care, capital losses, etc) to get down to $72,500 taxable income. All this stuff is in the calculator I provided. It's also a good idea to look at last year's tax return to see what is deducted where.