Author Topic: Possible dumb question from a newb!  (Read 2278 times)

tiffany24

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Possible dumb question from a newb!
« on: July 27, 2016, 11:53:11 AM »
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« Last Edit: August 22, 2016, 07:31:21 AM by tiffany24 »

Jack

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Re: Possible dumb question from a newb!
« Reply #1 on: July 27, 2016, 12:08:54 PM »
Right now, your income is $82k, which is the sum of your living expenses and your savings and (absent tax-deferrals) all $82k of it is subject to taxation.

In retirement, your income subject to taxation is only your living expenses -- whatever you don't need to spend that year simply does not get withdrawn from the accounts and thus remains untaxed. If your living expenses in retirement remained zero (as "literally going to be saving everything" implies they are now), then your income subject to taxation will be zero as well.

So sure, tax rates might be higher in the future, but the amount subject to that rate will be lower. As a simple example which ignores the difference between marginal tax rate and overall tax rate, consider this: which would you rather pay, 25% of $82K or 35% of $30K?

(I'm simplifying things a bit because I'm ignoring Required Minimum Distributions, but my thought on it is that if your RMD amount is high enough that it bumps you into a high tax bracket, then your problem is literally having too much money, which of course is no problem at all unless your last name is Brewster.)

ysette9

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Re: Possible dumb question from a newb!
« Reply #2 on: July 27, 2016, 12:11:53 PM »
Good job with the net worth and savings rate! That is a nice salary to be making at your age. Three cheers for engineering/tech!

I think you bring up a good question. Years ago we had a financial advisor talk to us about that. He pointed out that even historically in just this country our tax rates are quite low compared to what they have been. His opinion was that there was a good chance tax rates could go up in the future. Clearly no one knows what will happen. If you do the numbers assuming everything stays the same then it makes more sense to go with a traditional 401(k) in most cases. However, if you think there is a good case for tax rates going up, it might make you sleep better at night to go Roth. A number of years back I was doing Roth all the way and we coughed up a bunch of cash to pay for a Roth conversion of my husband's rollover IRA in the 2010-ish time frame. It may or may not be the right thing to do, but we are diversified in the types of tax-advantaged accounts we hold. There are much savvier people on the forums who will likely give you better food for thought than me. This is one question where I don't think there is a "right" answer since we are guessing about future tax policy.

On an unrelated note, I'd recommend being really clear and upfront with your boyfriend about finances, especially since you aren't paying rent. You wouldn't want resentment to build about being a "freeloader".

ysette9

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Re: Possible dumb question from a newb!
« Reply #3 on: July 27, 2016, 12:32:22 PM »
Kick-ass! Happy savings....

stoaX

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Re: Possible dumb question from a newb!
« Reply #4 on: July 27, 2016, 12:32:44 PM »
Right now, your income is $82k, which is the sum of your living expenses and your savings and (absent tax-deferrals) all $82k of it is subject to taxation.

In retirement, your income subject to taxation is only your living expenses -- whatever you don't need to spend that year simply does not get withdrawn from the accounts and thus remains untaxed. If your living expenses in retirement remained zero (as "literally going to be saving everything" implies they are now), then your income subject to taxation will be zero as well.

So sure, tax rates might be higher in the future, but the amount subject to that rate will be lower. As a simple example which ignores the difference between marginal tax rate and overall tax rate, consider this: which would you rather pay, 25% of $82K or 35% of $30K?

(I'm simplifying things a bit because I'm ignoring Required Minimum Distributions, but my thought on it is that if your RMD amount is high enough that it bumps you into a high tax bracket, then your problem is literally having too much money, which of course is no problem at all unless your last name is Brewster.)

Excellent explanation - worth reading twice!


Jack

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Re: Possible dumb question from a newb!
« Reply #5 on: July 27, 2016, 12:55:43 PM »
Excellent explanation - worth reading twice!

Thanks for this great explanation!

: )

On an unrelated note, I'd recommend being really clear and upfront with your boyfriend about finances, especially since you aren't paying rent. You wouldn't want resentment to build about being a "freeloader".

Thanks for the advice! To clarify- neither one of us will be paying. He owns a multifamily and the tenants cover his mortgage. Our only expense will be utilities which will be split evenly. No freeloader here :)

If you had equal equity in the property, that would be true. But since you don't, your boyfriend is suffering the opportunity cost of allowing you to live there for free when you could have been either paying rent or buying your "fair share" of the property, freeing up capital for him to invest elsewhere. (IMO, in theory this is true even if you're sharing the same unit.)

Sure, it's very possible he might be entirely okay with that situation -- but I still agree with ysette that you should double-check with him to make sure of it.

Curbside Prophet

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Re: Possible dumb question from a newb!
« Reply #6 on: July 27, 2016, 06:24:37 PM »
You qualify for a Roth so you could always throw $5500 in that every year to diversify against any potential tax hikes in retirement.

2lazy2retire

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Re: Possible dumb question from a newb!
« Reply #7 on: July 28, 2016, 06:52:01 AM »

On an unrelated note, I'd recommend being really clear and upfront with your boyfriend about finances, especially since you aren't paying rent. You wouldn't want resentment to build about being a "freeloader".

Thanks for the advice! To clarify- neither one of us will be paying. He owns a multifamily and the tenants cover his mortgage. Our only expense will be utilities which will be split evenly. No freeloader here :)

Are you sure - the fact that he owns does not mean he is not paying, are there taxes, maintenance and other costs to which you plan on contributing, just that you seem excited about the idea of "so i'm literally going to be saving everything" - hope you offer to buy food at least

ender

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Re: Possible dumb question from a newb!
« Reply #8 on: July 28, 2016, 07:01:48 AM »
You qualify for a Roth so you could always throw $5500 in that every year to diversify against any potential tax hikes in retirement.

And at $82k salary she'll be close to the phase out of a traditional IRA anyways. The 401k and HSA combined assuming no match on HSA is about $21k, which puts her salary right at the beginning of the IRA phase out (61k) - https://www.irs.gov/retirement-plans/plan-participant-employee/2016-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work

A nominal bonus means doing a Roth IRA is better than a traditional IRA.

talltexan

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Re: Possible dumb question from a newb!
« Reply #9 on: July 28, 2016, 09:49:53 AM »
I'm worried about the money in my Roth IRA finally coming out when they indeed raise taxes...by instituting a national Sales Tax. Sure I already paid the income tax on it, but it'll buy things just the same as 401(k) money.

But you should stick enough into the Roth to house your bonds. Unless you're planning on having 100% equities, getting the favorable tax treatment on bonds there will be worthwhile.