Author Topic: Tax-Advantage Savings accounts - Clarification Needed  (Read 2337 times)

Awitte58

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Tax-Advantage Savings accounts - Clarification Needed
« on: October 13, 2015, 10:04:35 AM »
Hello,

Single male with 55k annual salary. I was wondering if you guys have advice on more ways for tax deference.
I am currently maxing my 401k through my employer. Thankfully that drops me 18k which puts me into the 15% bracket.

My company does not offer a plan that qualifies as an HDHP so I cannot get an HSA. Or can I??

Can I start a 'traditional IRA' separate from my company and make contributions to that? Would contributions to an account of that sort be considered part of the $18000 or is it a separate thing altogether?
I guess I need some clarification on the difference between Tradition IRA and the 401k accounts and what I am allowed to contribute to each.

If I have no other tax advantage options for investing my money then what would you all recommend? I am debating between contributing to a Roth IRA, investing the extra into index funds, or paying down my mortgage with the extra.

Thanks in advance for any advice.

ShoulderThingThatGoesUp

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Re: Tax-Advantage Savings accounts - Clarification Needed
« Reply #1 on: October 13, 2015, 10:11:03 AM »
IRS link

You can contribute $5500 to a traditional IRA for tax year 2015 and deduct the full $5500 from your taxable income, it looks like. This would have no effect on your ability to contribute the full $18,000 to your 401k. It would prevent you from contributing to a Roth IRA because the $5500 limit applies to both Roth and Traditional IRA accounts.

Some people will tell you you're better off with Roth because you're in a low tax bracket now. Personally I take the deduction that is in existence right now because rules can change.

(Edited solely to close the URL tag)
« Last Edit: October 13, 2015, 11:18:01 AM by ShoulderThingThatGoesUp »

Awitte58

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Re: Tax-Advantage Savings accounts - Clarification Needed
« Reply #2 on: October 13, 2015, 10:38:29 AM »
Thanks for that. For some reason the way I worded my searches in google that never came up!

So since I earn less than 61,000 as a single individual. I can deduct the full $5500 to affect my AGI?
How do the logistics of an IRA account work that isn't through your employer?
Do I contribute to it with my cash which taxes have already been taken out and then the deduction will apply on my tax return and I will get that money back??

Pardon my ignorance, but this is the first year I am on my own officially and will be doing my taxes/having someone file for me.
 


ShoulderThingThatGoesUp

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Re: Tax-Advantage Savings accounts - Clarification Needed
« Reply #3 on: October 13, 2015, 11:25:46 AM »
Thanks for that. For some reason the way I worded my searches in google that never came up!

So since I earn less than 61,000 as a single individual. I can deduct the full $5500 to affect my AGI?

Yep.

Quote
How do the logistics of an IRA account work that isn't through your employer?
Do I contribute to it with my cash which taxes have already been taken out and then the deduction will apply on my tax return and I will get that money back??

Precisely. So your tax cost for the year will go down by $825 when you fund your tIRA with $5500. You can open one of these at most brokerages. I use Schwab, which has no fees on these accounts and you can use their very-low-ER funds without paying commission. You can open an account online, fund it with an ACH transfer (they have no minimum so you can do this gradually if desired) and invest it.

Most people here use Vanguard, which probably works similarly but I haven't experienced it.

You have until tax day next year to fund your tIRA, but as always the best day to invest is today, so you if you have the $5500 sitting around you can go ahead and do it.

If you're generally unsure if you're optimizing where you're putting your savings, I recommend posting a full case study using the template pinned at the top of this forum.

MDM

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Re: Tax-Advantage Savings accounts - Clarification Needed
« Reply #4 on: October 13, 2015, 08:04:46 PM »
How do the logistics of an IRA account work that isn't through your employer?
E.g., see https://investor.vanguard.com/ira/how-to-open-an-ira.  Fidelity and Schwab  (as mentioned above) are other firms with decent options:

https://www.bogleheads.org/wiki/Fidelity
https://www.bogleheads.org/wiki/Charles_Schwab
https://www.bogleheads.org/wiki/Three-fund_portfolio

ImCheap

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Re: Tax-Advantage Savings accounts - Clarification Needed
« Reply #5 on: October 14, 2015, 01:02:25 PM »
IRS link

Some people will tell you you're better off with Roth because you're in a low tax bracket now. Personally I take the deduction that is in existence right now because rules can change.

(Edited solely to close the URL tag)

I look at it from the other direction, I like to have a little of each, tIRA, rIRA and Taxable just for the sake of unknown future tax law. With that said I do lean mostly on Pre-Tax side. Something 70% IRA, 20% Roth and 10% taxable is sane I feel or 75% IRA and 25% Roth etc.

Sibley

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Re: Tax-Advantage Savings accounts - Clarification Needed
« Reply #6 on: October 14, 2015, 02:21:17 PM »
Also, re your taxes. You can do them yourself, there's tons of software options you can use in lieu of the pencil and paper approach. Yeah, it sounds scary, but it doesn't have to be. Don't automatically assume you can't handle it! When you get around to doing them, if you have questions there's a tax section now on the forum. I spent last tax season skimming and trying to help out with tax stuff where I could, and there's other accountants on here who were doing the same. Plus, some non-accountants who knew what they were talking about as well.

The IRS has some good resources on their website, including lists of tax prep websites.