Author Topic: Tax efficient saving: massive salary increase  (Read 2510 times)

IrishMustacian

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Tax efficient saving: massive salary increase
« on: February 15, 2016, 06:42:36 PM »
I have had fantastic luck applying for jobs, and my (currently modest) PhD salary will be multiplied by about 5 after I graduate. I have been living a fantastic (but relatively frugal) life during my PhD: I have managed about a 30% savings rate during this time while doing a lot of travel (camping and surf trips), going out to bars pretty regularly with friends, but keeping an eye on my spending and avoiding big ticket items (I have a very old car, and always go for the cheapest accommodation etc).

I see no reason to inflate my lifestyle much in the next few years, so the plan is to live off about one fifth of my new pre-tax salary, and save/invest all of the rest in the most tax-optimal way possible. It is pretty clear this will involve maxing my 401k, but beyond this I really don't know what to do with the extra money. Can I put it in tax advantaged account like a Roth IRA? Are there limits to how much I can put into retirement accounts?

The issue is somewhat complicated by the fact that I may return to Europe (probably the UK) in <5 years. I would hope that at the very least the money could be transferred in a tax efficient way to a retirement account outside of the US. It would be even better if it was possible to access the funds tax efficiently a few decades before turning 65. Incase it is relevant: I do not expect to have US citizenship at any time in the future.

GrowingTheGreen

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Re: Tax efficient saving: massive salary increase
« Reply #1 on: February 15, 2016, 07:55:26 PM »
Roth will only have a positive effect on your tax bill when you're withdrawing it. Other than maxing your 401k, you can also dump it into a Health Savings Account at work if you have one. What will your future income be?

ShoulderThingThatGoesUp

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Re: Tax efficient saving: massive salary increase
« Reply #2 on: February 15, 2016, 07:59:27 PM »
It's a great problem to have. Stipends at my grad school were $19,000, so I am guessing you're nearing $100,000? That puts you still below the Roth limit so that is a good target for $5500. However, depending when you start, you might squeak in with a modified AGI under $61,000 and be able to contribute to a tIRA in 2016.

seattlecyclone

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Re: Tax efficient saving: massive salary increase
« Reply #3 on: February 15, 2016, 08:02:30 PM »
I think US retirement accounts are treated differently by different foreign countries. You'll have to look into the relevant tax treaties to see what would happen. Contributing to a Roth IRA might not be a great idea if your country of retirement doesn't recognize the growth as tax-free in the same way the US does.

IrishMustacian

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Re: Tax efficient saving: massive salary increase
« Reply #4 on: February 15, 2016, 08:07:35 PM »
Thanks for the responses so far. I actually get closer to 30k in grad school (California is pretty pricey I guess so the stipends are a little higher than the US average). So it looks like I will not be eligible for Roth IRA from my very basic online research so far.

I will probably earn much less after this three year job ends (I plan to go back to academia). Yeah I will have to look into tax treaties for specific countries. It is tricky though because I actually have no idea which country I will end up in! This is one of the best (and worst) things about my career path as a scientist.

JLee

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Re: Tax efficient saving: massive salary increase
« Reply #5 on: February 15, 2016, 09:20:29 PM »
Thanks for the responses so far. I actually get closer to 30k in grad school (California is pretty pricey I guess so the stipends are a little higher than the US average). So it looks like I will not be eligible for Roth IRA from my very basic online research so far.

I will probably earn much less after this three year job ends (I plan to go back to academia). Yeah I will have to look into tax treaties for specific countries. It is tricky though because I actually have no idea which country I will end up in! This is one of the best (and worst) things about my career path as a scientist.

For your first year, don't forget to factor in the tax year -- i.e. if you make $30k/yr for the first 8 months of 2016 and you make $150k/yr for the last 4 months of 2016, that's only $60k so you would also be eligible for a traditional IRA for 2016.

IrishMustacian

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Re: Tax efficient saving: massive salary increase
« Reply #6 on: February 16, 2016, 09:08:42 AM »
Yes - that is a good point, and is hopefully how it will work out for the first tax year. So I should be able to contribute to a traditional IRA in the first year. Thanks JLee!