Author Topic: .  (Read 3528 times)

FXF

  • 5 O'Clock Shadow
  • *
  • Posts: 26
.
« on: September 11, 2016, 09:04:26 PM »
.
« Last Edit: April 30, 2018, 12:53:24 PM by FXF »

MDM

  • Walrus Stache
  • *******
  • Posts: 9499
Re: Reader Case Study - US retirement strategy from scratch
« Reply #1 on: September 11, 2016, 09:42:24 PM »
Gross Salary/Wages: 105k + 15k variable
Is that your expected annual income, or the amount for only Sept-Dec this year?  I'll assume annual....

Quote
My plan is currently to:
  • max out my 401k front loaded ergo: 18k + roughly 6k from my employer
  • max out our HSA front loaded ergo: 5150 + 1500 from my employer
  • Health: 60.57x26 ergo: 1574.76$
  • Vision: 3.60$x26 ergo: 93.72$
  • Dental: 12.17$x26 ergo: 316.44$
Good plan!

Quote
Adjusted Gross Income: 79865.08$ (+15k variable)
Taxes: No idea not payed any taxes in the US yet...
Variable income is the same as regular salary when it comes to AGI.  If you will have significant foreign income to report to the IRS when you files taxes in 2017 for the 2016 tax year, your might want to get a copy of TaxAct, TurboTax, etc. (even a 2015 version) and do some estimating now.  If your IRS-taxable income is all (or practically all) coming from your new job, the case study spreadsheet should give you a decent estimate of your tax situation.

Quote
Current expenses: No idea about the details yet. We will see
Start tracking. :)
We use Quicken but Mint, your own spreadsheet, etc. are all viable ways.

Quote
So I am curious about the best strategy I should use to invest my left over money (however much it might turn out to be... Living expenses are still a little unknown to me in the US)
See the 'Investment Order' tab in the spreadsheet mentioned above - it will pretty much support your thoughts. :)

Quote
till I learnt the following on another forum....
I know what that person was trying to say, and the tl;dr is correct, but there were some incorrect statements in that post.  See Backdoor Roth IRA - Bogleheads and links therein for probably the best backdoor Roth information available.

Quote
So next strategy ideas would be to just skip the tIRA completely? As I will be over the limit next year when my wife starts working.
But probably not over the $184K beginning of the Roth eligibility phase-out, correct?  If correct, then don't let the backdoor Roth affect your plans at all because you can use "the front door".

See Traditional versus Roth for a good summary (also, links in the 'Investment Order' tab mentioned above) of when it makes sense to use Roth vs. traditional.  It really depends on your marginal tax rates, and I don't know enough about IRS treatment of new US arrivals in general, let alone your specifics, to tell you any more than "figure out what your marginal rate will be for 2016 to make the 2016 decision, then refigure for 2017, then refigure for 2018, etc."

Good luck, and if you can clarify your tax situation then folks will be able to give more informed advice - or you'll be able to figure things out yourself.

Able was I ERE

  • Stubble
  • **
  • Posts: 160
  • Location: Austria
    • FIREhub.eu
Re: Reader Case Study - US retirement strategy from scratch
« Reply #2 on: September 12, 2016, 05:27:26 AM »
This year, you have a unique opportunity--you will likely only be taxed in the USA on income earned starting in September.  This means you will be a smaller tax bracket than any other time.  (When you leave, you may be considered a US person for to visa or green card status and have to pay taxes for whole year regardless of departure date.)

So, investigate lower income tax strategies.  For example, see if the Saver's Credit applies to you.  Consider contributing to a Roth IRA /401k instead of a Traditional due to your low (possibly zero) tax bracket.  Remember, we have both a standard deduction and exemptions that apply before income taxes start, that means iirc ~$20k can be earned before you are taxed at the federal level.

Also, investigate what happens to your retirement accounts tax wise when you return.  I vaguely recall that the US to Germany transition is highly tax favorable (ie you put your money in tax-deferred and might be able to remove tax free later---the US only taxes if you have enough income in the US, and Germany doesn't US tax retirement account withdrawals because it's treated identically to a taxable account).  However watch out for possible double taxation on the US retirement accounts--since the gains/dividends are taxable in Germany and the withdrawals are taxable in the US, but you can't use one to offset the other.  Read the tax treaty carefully.

Do your own research and/or obtain professional tax help.  The above is just my vague recollections from investigating a related situation.  Hope this helps.

Mother Fussbudget

  • Pencil Stache
  • ****
  • Posts: 830
  • Age: 57
  • Location: Indianapolis, IN
Re: Reader Case Study - US retirement strategy from scratch
« Reply #3 on: September 12, 2016, 01:35:01 PM »
+1 to MDM's post.  He always nails this type of response, and I'm glad he was the first to respond.

It sounds like you should have no problem setting up a ROTH-IRA for calendar 2016, and be under the maximum income contribution limits to max it out for the year.  You will have UNTIL April 15, 2017 to completely max out your ROTH contribution.  For 2016 tax year purposes, you won't need to do a 'backdoor ROTH' (T-IRA to Roth-IRA conversion).  But in future years, you may be making more than the maximum allowed to contribute directly to a ROTH-IRA.  So for 2017, if you anticipate working the full year @ $120/year, you'll want to setup a T-IRA account, contribute the maximum to that, and immediately CONVERT the T-IRA balance into your ROTH-IRA (backdoor ROTH).  Again... for the 2017 tax year, you'll have until April 15, 2018 to finalize the t-IRA/Roth-IRA contributions & conversions for the 2017 tax year.

So you'll want to do what most of us do:  early in the 2017, go to the TurboTax (or similar) tax return website, sign up to 'do your tax return' with them, and go thru the steps to find out what your total amounts will be.  [NOTE:  Fidelity, Vanguard, Schwab, investment firms usually give investors a discount link to use when signing up for the annual TurboTax subscription.  Use it.]  I get my W-2's showing 'income' by mid-February, and start my 'starter' tax-return right away.  It usually takes longer for investment accounts to give you the 1099 forms needed (showing dividend & interest income), but that usually gives you enough time to do your taxes with the income-only amount, and decide based on your YEAR END investment statements whether you think your investment dividends & interest will change your t-IRA/Roth-IRA eligibility.  By mid-march, you usually have enough paperwork to finalize your tax return.  Welcome to the US, and best of luck!

MDM

  • Walrus Stache
  • *******
  • Posts: 9499
Re: Reader Case Study - US retirement strategy from scratch
« Reply #4 on: September 12, 2016, 07:21:21 PM »
So to sum up you would suggest I go with Strategy 2 for now?
If by Strategy 2 you mean "...not using the Roth at all as I am in a high tax bracket right now" the first thing to do is confirm your marginal tax rate for 2016.  As Able was I ERE noted, you might have a very low marginal tax rate this year.  Note that "marginal tax rate" is not necessarily the same as "tax bracket", due to the complexity of tax law involving various credits, phase-outs, etc.

MDM

  • Walrus Stache
  • *******
  • Posts: 9499
Re: Reader Case Study - US retirement strategy from scratch
« Reply #5 on: September 13, 2016, 08:20:38 AM »
So next strategy ideas would be to just skip the tIRA completely? As I will be over the limit next year when my wife starts working.

Ok, this one?  Which limit do you expect to be over - tIRA deductibility or Roth contribution?

robartsd

  • Handlebar Stache
  • *****
  • Posts: 2354
  • Location: Sacramento, CA
Re: Reader Case Study - US retirement strategy from scratch
« Reply #6 on: September 13, 2016, 09:28:13 AM »
Let me fix the quote from the other forum:
Quote
In brief: if you have both pre-tax (Traditional) and after-tax (Roth or non-deductible Traditional) Traditional IRAs contributions, and you want to take any distribution from themyour Traditional IRA(s), then you have to take money from each type of account proportional to its balancetax cost basis. If you have both pre-tax and after-tax IRA money you cannot choose to withdraw / convert from only one type.
Both pre-tax and non-deductable contributions can be made to the same Traditional IRA account (they are not different account types and there is no advantage to keeping them separate - unless you want accounts at different companies for more diverse investment options). For tax purposes all your Traditional IRA funds are combined. Within you combined Traditional IRA accounts, the tax cost basis for for deductible IRA contributions is 0, the tax cost basis for non-deductible IRA contributions is the contribution amount. For any distribution from a Traditional IRA, your Traditional IRA cost basis is reduced by (Total Cost Basis Across All Traditional IRAs * Distribution Amount / Total Balance Across All Traditional IRAs Before the Distribution) and this portion of the distribution is not counted as income for tax purposes. Contributions made to one type of IRA (Roth or Traditional) have no influence on the tax treatment of distributions from the other type of IRA.

MDM

  • Walrus Stache
  • *******
  • Posts: 9499
Re: Reader Case Study - US retirement strategy from scratch
« Reply #7 on: September 13, 2016, 11:03:26 AM »
Let me fix the quote from the other forum:
Quote
In brief: if you have both pre-tax (Traditional) and after-tax (Roth or non-deductible Traditional) Traditional IRAs contributions, and you want to take any distribution from themyour Traditional IRA(s), then you have to take money from each type of account proportional to its balancetax cost basis. If you have both pre-tax and after-tax IRA money you cannot choose to withdraw / convert from only one type.
Both pre-tax and non-deductable contributions can be made to the same Traditional IRA account (they are not different account types and there is no advantage to keeping them separate - unless you want accounts at different companies for more diverse investment options). For tax purposes all your Traditional IRA funds are combined. Within you combined Traditional IRA accounts, the tax cost basis for for deductible IRA contributions is 0, the tax cost basis for non-deductible IRA contributions is the contribution amount. For any distribution from a Traditional IRA, your Traditional IRA cost basis is reduced by (Total Cost Basis Across All Traditional IRAs * Distribution Amount / Total Balance Across All Traditional IRAs Before the Distribution) and this portion of the distribution is not counted as income for tax purposes. Contributions made to one type of IRA (Roth or Traditional) have no influence on the tax treatment of distributions from the other type of IRA.
+1

Thanks, I took the easy way out and just said it was wrong, but this tells why.

MDM

  • Walrus Stache
  • *******
  • Posts: 9499
Re: Reader Case Study - US retirement strategy from scratch
« Reply #8 on: September 13, 2016, 11:15:10 AM »
I can see us being over $184,000 next year. So ineligible for Roth if I understand that correctly.
Mind you it's not a forgone conclusion my wife could just as well end up earning 5k less and we will be below that...

judging by your excel table,
I might go with a Roth this year and a tIRA next year...
The $184K is when the allowed "front door" Roth contribution amount begins to phase out linearly, and $194K is when the allowed amount drops to zero.  E.g., at $189K you may contribute exactly half the $5500 maximum.

Also, the $184K is based on Modified Adjusted Gross Income (MAGI).  See Amount of Roth IRA Contributions That You Can Make for 2016 and Publication 590-A (2015), Contributions to Individual Retirement Arrangements (IRAs) for more details.

In particular, 401k/403b/457 contributions (but not tIRA contributions) won't count toward your AGI because they aren't included in the line 7 income for Form 1040.  If you both contribute $18K to those plans, your gross salaries could be $220K (assuming no other adjustments) and your could make the full $5500 each contribution to a Roth IRA without needing to use the back door.