Author Topic: How much is too much?  (Read 3968 times)

COEE

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How much is too much?
« on: May 25, 2017, 09:46:49 AM »
Is there a limit to how much income is good?

I'm looking at making a bit more money than I have in the past.  Hopefully in the 120k - 140k range.  Is there some limit that I don't want to go above?  I would make this much either working direct or self-employed (not sure which will work out better for me yet - I'm evaluating both options).

Married file jointly.  My wife brings home ~25k/year.  She does not have a retirement plan at her work.  However, she is the owner of her business (S-corp) and she has talked about bringing home more in distributions near the end of the year assuming business continues to go well.  I've also offered up the idea of starting a retirement plan at her work, but she's not sure she can make that happen yet.

Last year our MAGI was just over 6 figures.  I have been able to deduct enough to keep us in the 15% tax bracket over the last few years.  However, I have been able to itemize deductions in the past, but I think our situation is getting to the point that we won't be able to itemize anymore.

We should both be able to max out an IRA regardless if I get a retirement plan at work or not.  But I'll probably phase out of traditional completely, and at least partially.  I'm also aware that I will not have to pay FICA over $127.2k.

I'm talking to a few different companies, but one company has a Simple IRA which doesn't give me a whole lot of tax shelter - but the company does match up to 3%.  I'm not against this because most of my money is in retirement accounts.  However, I'd like to stay in the 15% tax bracket before saving in a taxable account if at all possible.

Honestly the solo route might be best because I'll make more and be able to contribute to a individual 401k - sheltering up to $59k between the business and self.  But the paycheck won't be as stable.

Anything else I should consider?  I'm in CO if anyone has tax information there as well. 

Geez, I'm really getting to the point that I need a tax person, huh?  It's not as simple as it was when we were first starting out.

MDM

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Re: How much is too much?
« Reply #1 on: May 25, 2017, 10:07:49 AM »
Is there a limit to how much income is good?
...
Within the context of your question, "no".

It appears you already know at least some of this, but see
Solo 401(k) plan - Bogleheads
Backdoor Roth IRA - Bogleheads
Investment Order
for things that seem to apply to your situation.

omachi

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Re: How much is too much?
« Reply #2 on: May 25, 2017, 10:34:05 AM »
Here are the things that a higher income can change that I can think of off the top of my head. At some level of income you lose access to some deductions, like student loan interest and IRA contributions, you'll lose the ability to do a Roth IRA (except as a backdoor) entirely, and your capital gains tax rate goes from 0% to 15% when you hit the 25% tax bracket.

The IRA stuff phases out, though, and the money you make after taxes once you're past the phase out point is going to be more than not making that money and not paying taxes on contributions. The capital gains tax shouldn't be a concern, because if you're working then you're accumulating and not going to be incurring capital gains taxes anyway.

Remember tax brackets are marginal. If you're $1000 into the 25% bracket, you're only paying 25% on that $1000, the rest is at 10 or 15%. So it isn't like there's some huge jump in taxes to worry about just because you enter another bracket.

So like MDM said, no, there isn't a too much.

COEE

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Re: How much is too much?
« Reply #3 on: May 25, 2017, 10:58:46 AM »
Thanks for the info so far!

Remember tax brackets are marginal. If you're $1000 into the 25% bracket, you're only paying 25% on that $1000, the rest is at 10 or 15%. So it isn't like there's some huge jump in taxes to worry about just because you enter another bracket.

While, I understand what you're saying, I still think it's worth $0.25/$1 to try to keep my marginal tax rate in the 15% bracket if at all possible - especially since I'm saving a bunch anyway (I plan to save about 90% of whatever my increase is) - I'd rather save as much non-taxed as possible while my income is high.  At this income level and my situation I think the only way to stay in the 15% bracket is with a solo IRA or insist that my wife starts a retirement fund at her work.

I will admit that I have a tough time understanding the 'backdoor Roth'.  It's pretty complicated and the distribution of my assets make it more complicated.  I've tried to understand it multiple times - but haven't quite figured it out.  I just haven't found the right teaching tool yet.  I'm better with videos and pictures than a bunch of words on a screen - like most of the bogleheads website - when it comes to pretty advanced stuff like this.
« Last Edit: May 25, 2017, 11:01:50 AM by COEE »

MDM

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Re: How much is too much?
« Reply #4 on: May 25, 2017, 11:09:50 AM »
While, I understand what you're saying, I still think it's worth $0.25/$1 to try to keep my marginal tax rate in the 15% bracket if at all possible - especially since I'm saving a bunch anyway (I plan to save about 90% of whatever my increase is) - I'd rather save as much non-taxed as possible while my income is high.  At this income level and my situation I think the only way to stay in the 15% bracket is with a solo IRA or insist that my wife starts a retirement fund at her work.
There is a huge difference between staying in the 15% bracket by
a) refusing to make more money, vs.
b) saving gross income increases into tax-deferred accounts.

Method "a" smacks of "cutting off your nose to spite your face" while "b" seems "excellent foresight and planning".

Quote
I will admit that I have a tough time understanding the 'backdoor Roth'.  It's pretty complicated and the distribution of my assets make it more complicated.  I've tried to understand it multiple times - but haven't quite figured it out.  I just haven't found the right teaching tool yet.  I'm better with videos and pictures than a bunch of words on a screen - like most of the bogleheads website - when it comes to pretty advanced stuff like this.
Until your AGI approaches $186K, no need to worry about the backdoor Roth.

omachi

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Re: How much is too much?
« Reply #5 on: May 25, 2017, 11:22:30 AM »
There is a huge difference between staying in the 15% bracket by
a) refusing to make more money, vs.
b) saving gross income increases into tax-deferred accounts.

Method "a" smacks of "cutting off your nose to spite your face" while "b" seems "excellent foresight and planning".

What he said. But maximizing tax advantaged accounts doesn't really depend on your tax bracket for the incomes we're talking about. It's worthwhile to shelter income from taxes whether that tax is 15%, 25%, or higher.

COEE

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Re: How much is too much?
« Reply #6 on: May 25, 2017, 12:03:35 PM »
There is a huge difference between staying in the 15% bracket by
a) refusing to make more money, vs.
b) saving gross income increases into tax-deferred accounts.

Method "a" smacks of "cutting off your nose to spite your face" while "b" seems "excellent foresight and planning".

What he said. But maximizing tax advantaged accounts doesn't really depend on your tax bracket for the incomes we're talking about. It's worthwhile to shelter income from taxes whether that tax is 15%, 25%, or higher.

It doesn't sound like I'm missing anything that I haven't thought about.  Which answers my first question.

I guess I'm trying to hit a good balance of A and B. 

I have the potential to self-employee.  This gives me leverage to make more money (my business plan has me making more than $140k that I mentioned earlier), but also gives me a HUGE fucking $59k tax shelter - in addition to anything my wife could shelter.  And that doesn't even touch on savings from business expenses, etc.

Compare that to if I'm making slightly less (let's say $130k) and can only shelter $12.5k with a simple IRA.  That hurts a lot from a taxes and income point of view.

I guess my next question is what is the break even point where self-employment is better than direct?  I think maybe I'm already there and the numbers are clearly pointing to self-employment.

My wife just suggested that I do both for a period of time in order to grow the business but still be able to have a huge tax shelter.  Although - this can lead to conflicts with work between companies (I'd be in the same line of work for both, but would work in different industries).
« Last Edit: May 25, 2017, 12:10:20 PM by COEE »

omachi

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Re: How much is too much?
« Reply #7 on: May 25, 2017, 12:55:00 PM »
Not really my area of expertise, but if you're going to make more self employed (after all the fun self employment taxes, any loss of benefits, fees to register a company, more complicated tax reporting, etc.) and you don't mind the risk and extra work that comes with not just being somebody's employee, then it seems that's the way to go even without the tax shelter. If you're going to start a business, it's probably a good idea to hire a little time from a professional (attorney?, tax adviser?) that deals with such things regularly and will be able to guide you. It's my understanding that the good ones will more than pay for themselves by pointing out the easy way to do things and preventing costly mis-steps.

Putting $59k away tax free is huge, but do remember that Uncle Sam will get his pound of flesh eventually and that you're going to still have to pay normal income taxes on withdrawals at retirement time. There are ways to soften this, like Roth conversions in low income years during RE. If the excess of the $59k over what you can shelter now will come from the higher 25% bracket, you should be better off this way from a tax perspective. If it's out of the 15% bracket, you're probably slightly better off unless you grow a huge stash and required minimum distributions push you into a higher tax bracket in retirement.

Axecleaver

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Re: How much is too much?
« Reply #8 on: May 26, 2017, 07:01:06 AM »
Make sure you understand the limitations of Solo-K contributions. It's 18k up to 100% of your earned income; then 25% of earned income (with some adjustments) up to $54k.  Then you get a $6k catchup contribution over age 50, again limited to earned income. The SEP-IRA has similar limits, but the whole 54k is limited to 25% of earned income, so the Solo-K lets you get to the cap at lower income levels.

https://www.irs.gov/retirement-plans/one-participant-401k-plans

You also mentioned that your wife may bring home additional distributions. An S-corp is a passthrough entity, so you're taxed on your business's income when it is materially received. That is, when she receives the check in the mail, or it's deposited to her business checking account. It's not determined by the date of your distributions.

Once you phase out of tIRA contributions, you can look into how to do a backdoor Roth. In summary, you contribute $5500 in after-tax income to your traditional IRA, then do a conversion of that to your Roth.

In terms of strategy, maximize your income, then take every legal route to minimize the taxation that occurs on whatever you end up making. Once you get to the higher brackets, you can make strategic decisions about whether working more to earn more money at your marginal rate is worth it.

Bird In Hand

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Re: How much is too much?
« Reply #9 on: May 26, 2017, 07:23:00 AM »
If you're still in the earlier part of your accumulation phase, I agree with the other posters that you shouldn't avoid earning more just to stay in the 15% bracket.  IMO you're better off learning the ins-and-outs of the tax system, especially WRT your options for squirreling away more in tax-deferred accounts.

But things aren't as cut and dry if most of your accumulation is done and FI is already on the horizon.  My wife and I have income similar to yours, and we're currently discussing dialing back our work hours a bit to improve our quality of life now.  Why?  We realized that our marginal tax rate is close to 40% when you take into consideration FICA and some deductions that we will qualify for with a little less income.  In essence, we can get 10 more weeks of vacation per year at a cost of only 6 weeks of lost salary.  But we don't need those 6 weeks of salary to fund our current expenses, and it won't really affect our retirement timeline.

2Birds1Stone

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Re: How much is too much?
« Reply #10 on: May 26, 2017, 07:28:43 AM »
The short answer is no, as long as you are not working too much/too stressful of a job to enjoy your life.

mm1970

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Re: How much is too much?
« Reply #11 on: May 26, 2017, 09:46:20 AM »
Only thing that I can think of is the highly compensated employee limit, if you have a job with a 401k.

My company has to limit the % of money that anyone making over $120k puts into the 401k.  We have a lot of HCEs and not a lot of non-HCEs.

I'm not an HCE, but I do tell my boss that if the company EVER gives raises again, I wouldn't mind getting to $119k.

honeybbq

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Re: How much is too much?
« Reply #12 on: May 26, 2017, 09:51:35 AM »
Only thing that I can think of is the highly compensated employee limit, if you have a job with a 401k.

My company has to limit the % of money that anyone making over $120k puts into the 401k.  We have a lot of HCEs and not a lot of non-HCEs.

I'm not an HCE, but I do tell my boss that if the company EVER gives raises again, I wouldn't mind getting to $119k.

? The federal limit is the same no matter what your salary, correct, 18k? What am I missing?

boarder42

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Re: How much is too much?
« Reply #13 on: May 26, 2017, 09:58:48 AM »
Only thing that I can think of is the highly compensated employee limit, if you have a job with a 401k.

My company has to limit the % of money that anyone making over $120k puts into the 401k.  We have a lot of HCEs and not a lot of non-HCEs.

I'm not an HCE, but I do tell my boss that if the company EVER gives raises again, I wouldn't mind getting to $119k.

? The federal limit is the same no matter what your salary, correct, 18k? What am I missing?

there is a contribution limit for HCE employees from the employer match side.

honeybbq

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Re: How much is too much?
« Reply #14 on: May 26, 2017, 10:44:23 AM »
Only thing that I can think of is the highly compensated employee limit, if you have a job with a 401k.

My company has to limit the % of money that anyone making over $120k puts into the 401k.  We have a lot of HCEs and not a lot of non-HCEs.

I'm not an HCE, but I do tell my boss that if the company EVER gives raises again, I wouldn't mind getting to $119k.

? The federal limit is the same no matter what your salary, correct, 18k? What am I missing?

there is a contribution limit for HCE employees from the employer match side.

I see, yes, the total overall compensation. This is when having an option for deferred compensation is also nice...

mm1970

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Re: How much is too much?
« Reply #15 on: May 26, 2017, 11:30:39 AM »
Only thing that I can think of is the highly compensated employee limit, if you have a job with a 401k.

My company has to limit the % of money that anyone making over $120k puts into the 401k.  We have a lot of HCEs and not a lot of non-HCEs.

I'm not an HCE, but I do tell my boss that if the company EVER gives raises again, I wouldn't mind getting to $119k.

? The federal limit is the same no matter what your salary, correct, 18k? What am I missing?
The feds/ IRS don't want 401ks to be too much of a bonus for highly compensated employees.  Approx 50% of the 401k contributions have to be from non-HCE's. 

Companies that have a large # of HCE's are in a tough spot.  You can get around it, a bit, by matching.  So my last company started matching AND started auto-enrolling people.

But if your company has 80 people and 50 of them are HCE's and they are all doing $18k per year, that is $900k per year.  There's no way the other 30 can put that much into 401k.

If the other 30 people have an average salary of $80k and do 15% then that's $360,000.  So that means the other 50 people are limited to $360,000, or about $7200 a piece.

There are ways around it - hubby's company just flat out puts money into their 401k, it's not a "match".  Then you are a special category.

Anyway, I learned the hard way at my old company by accidentally selling just enough stock options to put me over the income.  I was limited to 5% 401k contributions the following year.  After that, I made sure to selectively exercise options so that each year I went either with "not many" or "a crap ton".

lemonde

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Re: How much is too much?
« Reply #16 on: May 28, 2017, 01:54:55 PM »
Charity?