Author Topic: How to retire early as a (relatively) low income person  (Read 6223 times)

tskzes

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How to retire early as a (relatively) low income person
« on: June 26, 2014, 09:55:41 AM »
Hey all, i make 29500 gross per year at my terribly low paying job. Due to being financially responsible i was able to save enough to buy a house at 26 years old And i have about 12000 worth of cash/stock at the moment. I have a employers etirement plan where incontribute five percent and my employer contributes nine percent. I put 300 per year into hsa which employer matches.

My question is related to whether or not i should try to max out my contributions to my 403b for the rest of the year to get the tax benefit and live off the cash that i have? I am wondering if i could get my income low enough that i could get a massive refund due to the savers tax credit and my reduced income? Or would i just get a standard deduction and not really see much benefit? I dont really understand how the tax system works

I also plan to open a roth ira this year just to start the timer because my understanding is that it has to be open for five years before contributions can be withdrawn penalty free. Correct me if i am wrong but any contributions to the roth ira is a win/win because i will still have access to that money in the nearer future but i get the short term benefit of the savers tax credit

Any advice about what to do in my situation is greatly appreciated, unfortunetly we cant all make 60k+ per year!
« Last Edit: June 26, 2014, 10:03:50 AM by tskzes »

matchewed

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Re: How much to save as a (relatively) low income person
« Reply #1 on: June 26, 2014, 10:03:47 AM »
Using your savings as income to save more will be a short term strategy, you might be able to game it for a year but at how much of a gain? What you will need is a lasting long term strategy.

Contributions to Roth IRA's can always be withdrawn. It is Roth IRA conversions and qualifying distributions (distributions generally will mean any gains as well as your contributions) which cannot for five years.

You either need to increase your income if you're having trouble saving (seems like you don't have too much trouble). Or keep minimizing expenses. I would still go with maximizing my 403b if I were in your shoes. I love the flexibility of multiple tax treated accounts but with your income (and frankly with your assumed expenses) it's a solid idea to put most of your savings into that bucket.

sdp

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Re: How to save as a (relatively) low income person
« Reply #2 on: June 26, 2014, 10:09:25 AM »
I make about 24K-26K every year.  I put 20% into my work retirement plan, I max out my Roth IRA, and I put about 1800 into my HSA every year.  My health insurance is 115/mo and my mortgage is just over 200/month.  because of the saver's tax credit it usually eliminates my tax liability every year and I get the full refund, which goes directly into my Roth, so by the end of April my Roth contributions for the year are usually over half of the 5500max.  Anyway, I usually do free stuff like mountain biking and hiking for fun.  I have a garden that occupies a lot of my time as well.  All in all I am living the dream, have a lot more free time to enjoy myself than my friends who make 70K.... anyway, it can/should be done where you can save 50% of your gross income every year...... Good luck and keep at it.
Cheers,
Scott

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Re: How to retire early as a (relatively) low income person
« Reply #3 on: June 26, 2014, 10:15:09 AM »
Hi!

It's really tough to invest when income is low. I know because I've totally been there.

Maxing out the 403b might be a lofty goal ($17,500 out of $29k gross is a lot!). However, you might want to max it to the point of employee match (I believe they only match up to a certain amount). After that, you could start on the Roth if you have extra money. As other have pointed out, you can withdraw from the Roth if you get into a tough situation.

The most important part is that you are saving. Good on you!

Davin

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Re: How to retire early as a (relatively) low income person
« Reply #4 on: June 26, 2014, 10:31:49 AM »
As near as I can tell, $29,000-$17,500=$11500, and if you were still able to max out your IRA ($5,500) that leave at $5000 taxable.  If you are single your standard deduction is $6,200 leaving you with $5000-$6200 in taxable income.  Your tax liability would be would be less than zero. I'll leave it up to you to figure out how to live on that.

ivyhedge

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Re: How to retire early as a (relatively) low income person
« Reply #5 on: June 26, 2014, 10:56:24 AM »
Maxing out the 403b might be a lofty goal ($17,500 out of $29k gross is a lot!). However, you might want to max it to the point of employee match (I believe they only match up to a certain amount). After that, you could start on the Roth if you have extra money. As other have pointed out, you can withdraw from the Roth if you get into a tough situation.


^This. And contribute to a (non-restricted) emergency fund. Start small.

tskzes

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Re: How to retire early as a (relatively) low income person
« Reply #6 on: June 26, 2014, 11:08:19 AM »
Hey all, I appreciate the replies! when i said max out my 403b i meant contribute as much as is reasonably possible to reduce my tax burden, not literally max it out. My main intent, and this is where i need someone who is more knowledge to give me advice, is that I would want to hit the lower income thresholds for the savers tax credit so that I get the most benefit for contributing to a saving plan. Does anyone know, if for example I was able to hit the lowest bracket (17,750$ for singer filers) how this would affect my tax refund? Would I actually see the entire 50% tax credit per my contribution or would this benefit be somehow reduced by other complex factors in the tax code?

Now that you have clarified that roth IRA never has penalty on distribution of contributions, is there any reason why I should not max out my 403b ROTH contributions (up to 17,500) or a separate vanguard roth IRA (up to 5000$) to benefit from the savers credit seeing as I could contribute the money, get the savers tax benefit, and (if I wanted to) pull the funds anyway?

Thanks a ton!
« Last Edit: June 26, 2014, 11:20:41 AM by tskzes »

matchewed

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Re: How to retire early as a (relatively) low income person
« Reply #7 on: June 26, 2014, 11:15:00 AM »
Hey all, I appreciate the replies! when i said max out my 403b i meant contribute as much as possible to reduce my tax burden, not literally max it out. My inclination, and this is where i need someone who is more knowledge to give me advice, is that I would want to hit the lower income thresholds for the savers tax credit so that I get the most benefit for contributing to a saving plan.


Now that you have clarified that roth IRA never has penalty on distribution of contributions, is there any reason why I should not max out my 403b ROTH contributions (up to 17,500) or a seperate vanguard roth IRA (up to 5000$) to benefit from the savers credit?

Thanks a ton!

The reason would be on how it affects your taxes. Contributing to a Roth will increase your MAGI as it is taxed now. This is not necessarily a bad thing as your income is low and that means your taxes are low. But tax deferment has positives as well. The best we can do is point out the tools and tips and you'll have to come up with the plan based on those.

tskzes

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Re: How to retire early as a (relatively) low income person
« Reply #8 on: June 26, 2014, 11:23:24 AM »
Hey all, I appreciate the replies! when i said max out my 403b i meant contribute as much as possible to reduce my tax burden, not literally max it out. My inclination, and this is where i need someone who is more knowledge to give me advice, is that I would want to hit the lower income thresholds for the savers tax credit so that I get the most benefit for contributing to a saving plan.


Now that you have clarified that roth IRA never has penalty on distribution of contributions, is there any reason why I should not max out my 403b ROTH contributions (up to 17,500) or a seperate vanguard roth IRA (up to 5000$) to benefit from the savers credit?

Thanks a ton!

The reason would be on how it affects your taxes. Contributing to a Roth will increase your MAGI as it is taxed now. This is not necessarily a bad thing as your income is low and that means your taxes are low. But tax deferment has positives as well. The best we can do is point out the tools and tips and you'll have to come up with the plan based on those.

I meant putting money into a ROTH IRA as opposed to not putting it into a tax advantaged account at all. If there is no penalty for withdrawal of a ROTH IRA and you can get a tax savers credit benefit from it. Why not max out a ROTH IRA, get the savers credit tax benefit, and you could just pull out that money once you have gotten your tax refund?
« Last Edit: June 26, 2014, 11:25:00 AM by tskzes »

matchewed

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Re: How to retire early as a (relatively) low income person
« Reply #9 on: June 26, 2014, 11:39:01 AM »
Hey all, I appreciate the replies! when i said max out my 403b i meant contribute as much as possible to reduce my tax burden, not literally max it out. My inclination, and this is where i need someone who is more knowledge to give me advice, is that I would want to hit the lower income thresholds for the savers tax credit so that I get the most benefit for contributing to a saving plan.


Now that you have clarified that roth IRA never has penalty on distribution of contributions, is there any reason why I should not max out my 403b ROTH contributions (up to 17,500) or a seperate vanguard roth IRA (up to 5000$) to benefit from the savers credit?

Thanks a ton!

The reason would be on how it affects your taxes. Contributing to a Roth will increase your MAGI as it is taxed now. This is not necessarily a bad thing as your income is low and that means your taxes are low. But tax deferment has positives as well. The best we can do is point out the tools and tips and you'll have to come up with the plan based on those.

I meant putting money into a ROTH IRA as opposed to not putting it into a tax advantaged account at all. If there is no penalty for withdrawal of a ROTH IRA and you can get a tax savers credit benefit from it. Why not max out a ROTH IRA, get the savers credit tax benefit, and you could just pull out that money once you have gotten your tax refund?

Because the savers credit depends on your AGI. Moving everything to Roth contributions (after tax) means you'll probably increase your AGI and may increase your gross out of eligibility for the savers credit. You'll have to run your own numbers since you're privy to them.

tskzes

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Re: How to retire early as a (relatively) low income person
« Reply #10 on: June 26, 2014, 11:59:13 AM »
^i know, my gross income is already below upper threshold for the savers credit which would be a 10% tax credit benefit. If the income is reduced to 17500 the tax credit would be 50%. I am wondering if reducing the agi to the lowe threshold would create a signifgant benefit on my tax refund. I will look into whether there is a tax simulator so i can weigh wheher or not this is worth the effort.

Alternatively i was just saying if i wanted to exploit the savers credit i could just dump money into a roth ira, get the benefit of the saveds credit and not have the burden of having my money locked in a tradional ira. I dont understand why there is a reason not to do this if you make less than 30k.

My goal will be to effectively pay zero taxes if this is possible
« Last Edit: June 26, 2014, 12:10:55 PM by tskzes »

matchewed

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Re: How to retire early as a (relatively) low income person
« Reply #11 on: June 26, 2014, 12:15:15 PM »
You're working mighty hard for an at best $200 tax credit given your income. You'd probably have a better shot picking up more income. Also given your income you would not be able to make a dollar more than $29.5k AGI. The moment you do your whole plan crumbles.

tskzes

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Re: How to retire early as a (relatively) low income person
« Reply #12 on: June 26, 2014, 12:41:37 PM »
^  edit: initially I thought you put 2000$ not 200$. Why do you think the tax benefit at best is 200$ tax benefit when my federal taxes are over 2000$?

Also I'm not sure you are correct about being close to the threshold because as previously mentioned at minimum I currently contribute 5% of my gross salary to my employer sponsored plan and 300$ to HSA which unless I am mistaken both reduce my taxable gross income. Also, if I contribute more to the employer sponsored 403b pre-tax as was previously mentioned, wouldn't that lower my taxable income and then keep me well below the upper threshold for the savers credit and potentially take me to the lower brackets and thus increase the benefit? These are critical assumptions about my plan, so please correct me if I am wrong in thinking that contributing more of my monthly pay pre-tax to employer sponsored 403b retirement plan reduces my AGI?


« Last Edit: June 26, 2014, 12:52:11 PM by tskzes »

matchewed

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Re: How to retire early as a (relatively) low income person
« Reply #13 on: June 26, 2014, 12:51:25 PM »
^  edit: initially I thought you put 2000$ not 200$. Why do you think the tax benefit at best is 200$ tax benefit when my federal taxes are over 2000$?

Also I'm not sure you are correct about being close to the threshold because I contribute 5% of my gross salary to my employer sponsored plan and 300$ to HSA which unless I am mistaken both reduce my taxable gross income. Also, if I contribute more to the employer sponsored 403b pre-tax as was previously mentioned, wouldn't that lower my taxable income and then keep me well below the upper threshold for the savers credit and potentially take me to the lower brackets and thus increase the benefit? These are critical assumptions about my plan, so please correct me if I am wrong in thinking that contributing more of my monthly pay pre-tax to employer sponsored 403b retirement plan reduces my AGI?

Run the numbers yourself. Here's the form. http://www.irs.gov/pub/irs-pdf/f8880.pdf

tskzes

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Re: How to retire early as a (relatively) low income person
« Reply #14 on: June 26, 2014, 01:17:47 PM »
^  edit: initially I thought you put 2000$ not 200$. Why do you think the tax benefit at best is 200$ tax benefit when my federal taxes are over 2000$?

Also I'm not sure you are correct about being close to the threshold because I contribute 5% of my gross salary to my employer sponsored plan and 300$ to HSA which unless I am mistaken both reduce my taxable gross income. Also, if I contribute more to the employer sponsored 403b pre-tax as was previously mentioned, wouldn't that lower my taxable income and then keep me well below the upper threshold for the savers credit and potentially take me to the lower brackets and thus increase the benefit? These are critical assumptions about my plan, so please correct me if I am wrong in thinking that contributing more of my monthly pay pre-tax to employer sponsored 403b retirement plan reduces my AGI?

Run the numbers yourself. Here's the form. http://www.irs.gov/pub/irs-pdf/f8880.pdf
Ah, I see that there is a maximum contribution of 2000$ that you can get the credit for so the maximum benefit would then be 1000$ at the lowest AGI bracket for the savers credit. So if I was to put ~12,000$ into pre-tax 403b to lower myself to the lowest bracket I would save 15% of that on taxes that would be 1,800$ plus 1000$ credit might be enough to make me zero tax liability.


matchewed

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Re: How to retire early as a (relatively) low income person
« Reply #15 on: June 26, 2014, 01:28:44 PM »
^  edit: initially I thought you put 2000$ not 200$. Why do you think the tax benefit at best is 200$ tax benefit when my federal taxes are over 2000$?

Also I'm not sure you are correct about being close to the threshold because I contribute 5% of my gross salary to my employer sponsored plan and 300$ to HSA which unless I am mistaken both reduce my taxable gross income. Also, if I contribute more to the employer sponsored 403b pre-tax as was previously mentioned, wouldn't that lower my taxable income and then keep me well below the upper threshold for the savers credit and potentially take me to the lower brackets and thus increase the benefit? These are critical assumptions about my plan, so please correct me if I am wrong in thinking that contributing more of my monthly pay pre-tax to employer sponsored 403b retirement plan reduces my AGI?

Run the numbers yourself. Here's the form. http://www.irs.gov/pub/irs-pdf/f8880.pdf
Ah, I see that there is a maximum contribution of 2000$ that you can get the credit for so the maximum benefit would then be 1000$ at the lowest AGI bracket for the savers credit. So if I was to put ~12,000$ into pre-tax 403b to lower myself to the lowest bracket I would save 15% of that on taxes that would be 1,800$ plus 1000$ credit might be enough to make me zero tax liability.
Yep.

Taxes may seem esoteric. But you can literally run through and pull all the forms and jot down various scenarios to find one that works with you, your expenses, and your goals. They seem really complicated at first but diving on in and following the instructions really puts the lightbulb over the head.

Like I said before. We can point at the tools. The best part is being able to use them and understand them to form your own ideal plan.

innerscorecard

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Re: How to retire early as a (relatively) low income person
« Reply #16 on: June 26, 2014, 10:55:24 PM »
If you want to retire radically early than everyone else at your income level, you need to be doing things that are radically different than everyone else at your income level. Part of this is saving and reducing expenses, as you've wisely done. But at some point you will need to do something with a bigger multiplier than merely saving another $200 per year. Maybe it's getting a part-time gig that increases you income by a significant fraction. Or maybe it's even moving to Thailand or Nicaragua. Otherwise, it's not realistic to expect to be able to retire early on such a salary.

Another step that is more necessary the lower your income is, is getting married. That's the original corporation and will let you reduce expenses in a very big way while increasing income.

wtjbatman

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Re: How to retire early as a (relatively) low income person
« Reply #17 on: June 27, 2014, 07:33:49 AM »
Otherwise, it's not realistic to expect to be able to retire early on such a salary.

That's not true. I make a pretty low income (a tad higher than the OP but lower than loads of other mustachians), but my expenses are also some of the lowest I have seen on these forums for someone who doesn't have any part of their expenses subsidized by an employer. If I keep my expenses the same, and continue to save 50% of my income a year, I can retire in the exact same time frame as someone making $100,000 a year who has the same saving rate but requires $50,000 a year in retirement. Obviously they are saving more than me every year, but it doesn't matter because I need a lot less to maintain my lifestyle.

I know that increasing income vs slashing expenses is a big debate in the ER community, and of course ideally you would do both, but it's all perspective. I live in a small midwestern town with a low COL, so my plan works. If I lived on one of the coasts I'd be scrambling to find a higher paying job just to pay for my housing.

sly

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Re: How to retire early as a (relatively) low income person
« Reply #18 on: June 29, 2014, 03:47:28 PM »
Otherwise, it's not realistic to expect to be able to retire early on such a salary.

That's not true. I make a pretty low income (a tad higher than the OP but lower than loads of other mustachians), but my expenses are also some of the lowest I have seen on these forums for someone who doesn't have any part of their expenses subsidized by an employer. If I keep my expenses the same, and continue to save 50% of my income a year, I can retire in the exact same time frame as someone making $100,000 a year who has the same saving rate but requires $50,000 a year in retirement. Obviously they are saving more than me every year, but it doesn't matter because I need a lot less to maintain my lifestyle.

I know that increasing income vs slashing expenses is a big debate in the ER community, and of course ideally you would do both, but it's all perspective. I live in a small midwestern town with a low COL, so my plan works. If I lived on one of the coasts I'd be scrambling to find a higher paying job just to pay for my housing.

thanks for posting this! Sometimes this forum feels a bit like a personal finance blog for high earners, nothing wrong with it but it's not particularly inspiring. The real value of mustachianism IMO is in helping lower income people/families regain control of their finances.

frugalmusician

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Re: How to save as a (relatively) low income person
« Reply #19 on: July 03, 2014, 01:29:48 AM »
Wow, this is great Scott.  Can you start a separate post where you detail how you do this?  Perhaps under sharing your badassity?

As to the original question, in general the IRS has pretty good publications on their website that answer questions about the savers credit, retirement contributions, etc.  You might also read rough those in addition to the answers you get here.

I make about 24K-26K every year.  I put 20% into my work retirement plan, I max out my Roth IRA, and I put about 1800 into my HSA every year.  My health insurance is 115/mo and my mortgage is just over 200/month.  because of the saver's tax credit it usually eliminates my tax liability every year and I get the full refund, which goes directly into my Roth, so by the end of April my Roth contributions for the year are usually over half of the 5500max.  Anyway, I usually do free stuff like mountain biking and hiking for fun.  I have a garden that occupies a lot of my time as well.  All in all I am living the dream, have a lot more free time to enjoy myself than my friends who make 70K.... anyway, it can/should be done where you can save 50% of your gross income every year...... Good luck and keep at it.
Cheers,
Scott