Author Topic: FIRED and want to reduce MAGI - IRA?  (Read 772 times)

Loren Ver

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FIRED and want to reduce MAGI - IRA?
« on: April 15, 2019, 01:58:33 PM »
Hello,
This should be simple, but I really wanted a double check so I don't mess anything up :).

DH and I FIRED at the end of March 2019. *****happy dance, happy dance!!!****
Some background
DH had most of his income going into HSA and 401k.  So for Q1 2019 his take home pay was ~$1,100.
My company caps my contributions so I brought home ~$11,520 for the same period. 
Neither of us managed to max anything out before ending employment.   
For 2019 we want to keep our MAGI in the $25,000 range. 
So this income gets us to $12,620 as a family.

I want to give us some additional buffer in our MAGI, so to do this could I put money into a traditional IRA?  The contribution limit in 2019 is $6000 per person (we are both under 40) and this would reduce our MAGI correct?  Also, I can put in $6000 for me, but how much can DH put in?  Is his max $1100?  Or is there a way for my income to cover the gap?  We always file married/jointly. 

Also- we could wait until early 2020 to do this contribution to see where all our dividends etc play out correct for MAGI correct?

Thank you!!

Loren

MonkeyJenga

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Re: FIRED and want to reduce MAGI - IRA?
« Reply #1 on: April 15, 2019, 02:14:37 PM »
Congrats!

What did your taxable investments throw off in income over the last few years? That will give you a good estimate for this year.

Assuming the above is low enough and you don't earn more money, I would put the money in Roth IRA's, since they're being taxed at 0% this year. If your taxable holdings are qualified dividends/long term cap gains, those will have a higher ceiling to be taxed at 0%.

Your earnings should be able to cover his contributions if you're MFJ, but I googled to check. I am not a financial advisor, don't listen to me. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
« Last Edit: April 15, 2019, 03:04:17 PM by MonkeyJenga »

MDM

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Re: FIRED and want to reduce MAGI - IRA?
« Reply #2 on: April 15, 2019, 07:46:05 PM »
+1 to MJ's comments and questions.

Reading between the lines, if you are expecting ~$25K in dividends then your taxable holdings might be ~$25K/2% = $1.25 million.  If your traditional account balances are similar (or higher), you may want to do traditional to Roth conversions before RMDs and SS benefits start.

Loren Ver

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Re: FIRED and want to reduce MAGI - IRA?
« Reply #3 on: April 16, 2019, 08:43:20 AM »
Thank you for the replies! 

Our investments aren't nearly that high, and my concern isn't entirely dividends. 
I am thinking about pulling money out of investments in 2019 to cover some of 2020 and moving more money into bonds.  I don't want to get too close to my MAGI as sometimes some of my taxable funds spit out gains by the end of the year (usually less than 1000 but two years ago it was thousands).  Enough that I am wary of a ACA cliff. 

Any money moving I will be doing will be tax free as we are below the standard deduction and in the 0% capital gains tax bracket, but I would like to know there is an option to shelter more money if I need to pull out some investments or if we get unexpectedly high gains paying out (like two years ago). 

MonkeyJenga

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Re: FIRED and want to reduce MAGI - IRA?
« Reply #4 on: April 16, 2019, 09:47:28 AM »
You have until the tax filing deadline to contribute to an IRA: https://www.irs.gov/retirement-plans/traditional-and-roth-iras

It might be worth contributing to a Roth now, and then recharacterizing to a tIRA if needed. Then you can get the (in theory) 2019 gains included in the tIRA, instead of just the 6k pp.

Loren Ver

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Re: FIRED and want to reduce MAGI - IRA?
« Reply #5 on: April 16, 2019, 02:06:24 PM »
Interesting. I've never looked into recharacterizing from a Roth to an tIRA.  I'll look into that.

Thanks!