Author Topic: Need help finding a tax haven  (Read 14953 times)

joer1212

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Need help finding a tax haven
« on: August 03, 2012, 11:47:04 AM »
I have maxed out, both my 401k and 457b plans at work (total 34k/yr), plus my Roth IRA (5k/yr). Every year, after I shelter nearly $40,000 from taxes, I still end up making about $42,000 in taxable income (36k salary + $6,000 interest from 5 corporate bonds).
Is there any way I can shelter even more money from taxes. I am in the 25% tax bracket now, and I would love to get into the 15% bracket.
I read somewhere that I can also contribute to an annuity pretax, is this true?
I know I can sell my corporate bonds, but I would still have the problem of where to put this money tax-deferred, so selling them doesn't solve anything.
I live in NYS, and to get into the 15% tax bracket I would have to have an annual income of less than 34k.
« Last Edit: August 03, 2012, 11:48:55 AM by joer1212 »

velocistar237

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Re: Need help finding a tax haven
« Reply #1 on: August 03, 2012, 12:09:08 PM »
Get married.

Chris

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Re: Need help finding a tax haven
« Reply #2 on: August 03, 2012, 03:14:13 PM »
Some ideas:

  • HSA contributions - up to $3100 deductible contribution. Requires high-deductible health plan.
  • Municipal bonds - for you living in NY, municpal bonds issued by NY and Puerto Rico are exempt from state and federal income tax.
  • US Savings bonds - up to $10k per year per series (I and EE). Interest compounds tax-deferred. Free of state income tax.
  • MLPs - distributions are largely shielded from income tax at the time they are paid, though cost basis is reduced. Thus, you will pay more taxes when selling your units. So distributions are effectively tax-deferred.

nevinera

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Re: Need help finding a tax haven
« Reply #3 on: August 03, 2012, 07:08:54 PM »
>I am in the 25% tax bracket now, and I would love to get into the 15% bracket.

Whenever I see somebody ask this type of question, I wonder.. Do you know something about tax brackets I don't, or do you just not understand marginal taxation?

As far as I understand it, getting from one tax bracket to another doesn't change the rate at which each dollar is taxed. Dropping one dollar from your income to drop you into a lower tax bracket wouldn't really do anything much; only that one dollar was being taxed at the higher rate anyway. But I don't claim to have a strong grasp of tax law, so if there's some kind of non-marginal advantage to shifting tax brackets, could somebody point it out for me?

joer1212

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Re: Need help finding a tax haven
« Reply #4 on: August 03, 2012, 10:58:56 PM »
Quote
As far as I understand it, getting from one tax bracket to another doesn't change the rate at which each dollar is taxed. Dropping one dollar from your income to drop you into a lower tax bracket wouldn't really do anything much; only that one dollar was being taxed at the higher rate anyway. But I don't claim to have a strong grasp of tax law, so if there's some kind of non-marginal advantage to shifting tax brackets, could somebody point it out for me?

You know, I didn't think about this.
So, the first 34k of my 42k annual gross income is taxed at 15%? Only $8,000 of my income, then, is taxed at 25%.
But, still, it would be nice to shield this 8k from tax erosion that will cut this money down by a quarter.
« Last Edit: August 03, 2012, 11:00:29 PM by joer1212 »

joer1212

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Re: Need help finding a tax haven
« Reply #5 on: August 03, 2012, 11:05:32 PM »
Some ideas:

  • HSA contributions - up to $3100 deductible contribution. Requires high-deductible health plan.
  • Municipal bonds - for you living in NY, municpal bonds issued by NY and Puerto Rico are exempt from state and federal income tax.
  • US Savings bonds - up to $10k per year per series (I and EE). Interest compounds tax-deferred. Free of state income tax.
  • MLPs - distributions are largely shielded from income tax at the time they are paid, though cost basis is reduced. Thus, you will pay more taxes when selling your units. So distributions are effectively tax-deferred.

But none of these are vehicles that I can contribute money to directly from my paycheck, pretax, except the HSA, for which I don't qualify.
Even so, I would have invested some of my money into municipal bonds, the only problem is that municipals (as far as I know) are long-term bonds, and that's the last place to put your money in a low interest rate environment.

sol

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Re: Need help finding a tax haven
« Reply #6 on: August 03, 2012, 11:07:03 PM »
You know, I didn't think about this.
So, the first 34k of my 42k annual gross income is taxed at 15%. Only $8,000 of my income, then, is taxed at 25%.

Most people don't, and it's a relevant observation.

Also remember that the tax code actually has a 0% tax bracket on part of your income, 11.9k for a married couple, plus more for children.  The last time I figured it out, I calculated that we would pay an effective 4.8% tax rate on our first 28.6k of income.

And those Bush tax cuts that Congress is arguing over?  One side wants to keep them for income up to 250k, the other side wants to keep them for all income.  Nobody seems to realize that keeping them for income up to 250k is a tax break for EVERYBODY.  Not just the middle class.  Even the super wealthy will be paying lower taxes on the first 250k of their income.


sol

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Re: Need help finding a tax haven
« Reply #7 on: August 03, 2012, 11:08:39 PM »

JohnGalt

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Re: Need help finding a tax haven
« Reply #8 on: August 03, 2012, 11:49:58 PM »
Has anyone ever looked into getting their employer to decrease their salary while increasing their 401k match an offsetting amount?

This could, in theory, allow you to put up to $50,000 ($17,000 limit + $33,000 match limit) into a 401k using 2012 limits. 

Alternatively - what about going contract for your employer where you start a company that bills them for your time.  I believe the self employment 401k/IRA options allow larger contribution amounts than $17,000.

pca

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Re: Need help finding a tax haven
« Reply #9 on: August 04, 2012, 01:03:02 AM »
If you haven't yet, consider buying a house and living in it. It'll grow tax-free (thanks to the exclusion on capital gains on your primary residence), and you'll trade your rent for tax-deductible mortgage interest and property taxes.

Chris

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Re: Need help finding a tax haven
« Reply #10 on: August 04, 2012, 07:22:05 AM »
But none of these are vehicles that I can contribute money to directly from my paycheck, pretax, except the HSA, for which I don't qualify.

You say you want a sub-34k annual income. The easiest way to get there is to quit making $6k in taxable bond interest and move that into a tax deferred vehicle. Then you need to hunt for another $2k in deductions.

There are only so many deductions available to you.  House, marriage, kids.... how drastic a change are you willing to make because you hate taxes?

Even so, I would have invested some of my money into municipal bonds, the only problem is that municipals (as far as I know) are long-term bonds, and that's the last place to put your money in a low interest rate environment.

If you buy bonds on the secondary market, you can find them expiring in a year or two (though you might not like the yield).

joer1212

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Re: Need help finding a tax haven
« Reply #11 on: August 05, 2012, 01:00:21 AM »
Has anyone ever looked into getting their employer to decrease their salary while increasing their 401k match an offsetting amount?

This could, in theory, allow you to put up to $50,000 ($17,000 limit + $33,000 match limit) into a 401k using 2012 limits. 

Alternatively - what about going contract for your employer where you start a company that bills them for your time.  I believe the self employment 401k/IRA options allow larger contribution amounts than $17,000.


I work for NYC transit (train operator), so they don't cut deals like this. Everything is very strict and academic. Maybe if I worked for a very small firm or a private employer......

joer1212

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Re: Need help finding a tax haven
« Reply #12 on: August 05, 2012, 01:09:10 AM »
Quote
You say you want a sub-34k annual income. The easiest way to get there is to quit making $6k in taxable bond interest and move that into a tax deferred vehicle. Then you need to hunt for another $2k in deductions.

But, where exactly would I put this money into a "tax deferred vehicle", when I have already maxed-out all my tax-free and tax-deferred options? That is the whole point of my post, which is to ask what other tax-deferred vehicles are available to me?

COguy

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Re: Need help finding a tax haven
« Reply #13 on: August 06, 2012, 10:15:39 AM »
You can always use very broad index funds with low turnover (vanguard's total stock market index comes to mind).  These tend to have low dividends, so in a way your growth is for the most part tax-deferred.  Basically, you will only pay the capital gains when you sell.  If you sell when you retire in a lower bracket, this can work in your favor.

There are also many tax-managed funds out there if you shop around.  Vanguard has some and I imagine there are many others.

Personally, I use some closed end high yield broad municipal bonds in my taxable space.  I keep them at a small chunk of my allocation though as they can be very risky in bad times.  Those are times when you can get fire-sale prices though.  I have to pay state tax on the distributions, but there is no federal tax. 

The nice thing about the above options is you can sell at any time (maybe not for a great price though) and get the cash if you need it for whatever reason.  This is unlike many of the aforementioned tax-shelters which can be illiquid at times or require you to pay a penalty to get at the money.  Of course if you have a lot of money already stash'ed outside of retirement accounts that may not matter and the above options probably are not you best bet. 

Just something to think about.  I am just starting out my journey, so I am sure the other folks on here can step in and pick apart what I said above.


joer1212

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Re: Need help finding a tax haven
« Reply #14 on: August 06, 2012, 10:35:37 PM »
I already have broad market index funds in my 401k and 457b to which I invest 34k a year.
I was seriously considering a New York State municipal bond fund that Vanguard sells (VNYTX), which would be good for me because I live in Brooklyn, NY, so I wouldn't have to pay city, state or federal taxes on it. However, it is long-term, so when interest rates rise I will get hit hard.
Does anyone know if contributing to an annuity is tax-deferred?

tomsang

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Re: Need help finding a tax haven
« Reply #15 on: August 07, 2012, 07:44:30 AM »
At your income level, a rental house would be a great way to drop your income. For rental houses you can cash-flow and generate up to $25k in taxable depreciation losses.  With mortgage interest at longterm inflation rates it seems like a no brainer to build wealth, lower taxes and create a hedge for inflation.

joer1212

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Re: Need help finding a tax haven
« Reply #16 on: August 07, 2012, 08:16:41 PM »
At your income level, a rental house would be a great way to drop your income. For rental houses you can cash-flow and generate up to $25k in taxable depreciation losses.  With mortgage interest at longterm inflation rates it seems like a no brainer to build wealth, lower taxes and create a hedge for inflation.

I just don't want anything to do with tenants or responsibilities. That is the whole reason for wanting to retire early-- to avoid headaches and hassles.

JohnGalt

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Re: Need help finding a tax haven
« Reply #17 on: August 07, 2012, 08:30:06 PM »
At your income level, a rental house would be a great way to drop your income. For rental houses you can cash-flow and generate up to $25k in taxable depreciation losses.  With mortgage interest at longterm inflation rates it seems like a no brainer to build wealth, lower taxes and create a hedge for inflation.

I just don't want anything to do with tenants or responsibilities. That is the whole reason for wanting to retire early-- to avoid headaches and hassles.

I think you've tapped all the tax havens available to you without having your own business of some sort. 

joer1212

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Re: Need help finding a tax haven
« Reply #18 on: August 08, 2012, 06:39:54 PM »
Quote
I think you've tapped all the tax havens available to you without having your own business of some sort.

Yeah, I figured that.

CptMrPants

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Re: Need help finding a tax haven
« Reply #19 on: August 08, 2012, 08:10:20 PM »
This may be a dumb question, but If most of your money is tired up in pre tax retirement accounts, where are you going to get your retirement income?

With an eye to retire early, my only pre tax contributions are to an HSA.  And my only retirement account is a ROTH.


JohnGalt

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Re: Need help finding a tax haven
« Reply #20 on: August 08, 2012, 08:17:19 PM »
This may be a dumb question, but If most of your money is tired up in pre tax retirement accounts, where are you going to get your retirement income?

With an eye to retire early, my only pre tax contributions are to an HSA.  And my only retirement account is a ROTH.

There are a few ways to access 401k/IRA money for early retirement.

72(t) distributions allow you to make withdrawals as long as you follow guidelines essentially turning the IRA into an annuity.  This will usually result in amounts too small though.

The preferred method seems to be use annual IRA to Roth IRA conversions in amounts enough to cover 1 year of expenses 5 years down the line.  After a 5 year vesting, the converted funds can be withdrawn penalty free as contributions.  Since you're only converting 1 years worth of expenses, your tax rate should be low allowing you to pay very low taxes.

Even if neither of those two options were available - I would still max out my 401k.  I'm in the 28% tax bracket - in retirement I will at most be in the 15% bracket.  15% + 10% penalty is still less than 28% and the money gets to grow tax free while it's in the account.

joer1212

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Re: Need help finding a tax haven
« Reply #21 on: August 09, 2012, 11:59:39 PM »
This may be a dumb question, but If most of your money is tired up in pre tax retirement accounts, where are you going to get your retirement income?

With an eye to retire early, my only pre tax contributions are to an HSA.  And my only retirement account is a ROTH.

I can withdraw my 457b money penalty-free.
I can withdraw my contributions to my ROTH IRA penalty-free, which is more than what I will withdraw in one chunk.
I will use the 72(T) rule to withdraw my money from my 401k.

CptMrPants

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Re: Need help finding a tax haven
« Reply #22 on: August 10, 2012, 08:38:13 AM »
Read up on the 457b...

I wish there was a version of the 457b for the non-governmental employee, that sounds like the perfect early retirement vehicle!

joer1212

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Re: Need help finding a tax haven
« Reply #23 on: August 11, 2012, 12:55:44 AM »
Read up on the 457b...

I wish there was a version of the 457b for the non-governmental employee, that sounds like the perfect early retirement vehicle!

Yes, it is. I wish I could contribute all 34k/yr to a 457b, rather than put half of than amount in a 401k.

joer1212

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Re: Need help finding a tax haven
« Reply #24 on: August 12, 2012, 01:03:23 AM »
Quote
The preferred method seems to be use annual IRA to Roth IRA conversions in amounts enough to cover 1 year of expenses 5 years down the line.  After a 5 year vesting, the converted funds can be withdrawn penalty free as contributions.  Since you're only converting 1 years worth of expenses, your tax rate should be low allowing you to pay very low taxes.


I don't quite understand this, can you clarify in more detail?
I am under the impression that any money from a regular IRA that rolls over into a ROTH IRA is first subject to income tax. Then the remaining amount is considered a ROTH contribution that is not subject to taxation.  Ditto for any 401k/457b rollovers into a ROTH IRA.
« Last Edit: August 12, 2012, 01:05:08 AM by joer1212 »

JohnGalt

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Re: Need help finding a tax haven
« Reply #25 on: August 12, 2012, 11:49:20 AM »
Quote
The preferred method seems to be use annual IRA to Roth IRA conversions in amounts enough to cover 1 year of expenses 5 years down the line.  After a 5 year vesting, the converted funds can be withdrawn penalty free as contributions.  Since you're only converting 1 years worth of expenses, your tax rate should be low allowing you to pay very low taxes.


I don't quite understand this, can you clarify in more detail?
I am under the impression that any money from a regular IRA that rolls over into a ROTH IRA is first subject to income tax. Then the remaining amount is considered a ROTH contribution that is not subject to taxation.  Ditto for any 401k/457b rollovers into a ROTH IRA.

You're right, it will be subject to income tax.  Here's an example.

Assumptions

Annual Expenses: $24,000
Pre-Tax Account Values:  $500,000
Roth Account Values:  $200,000
SWR: 4%

Each year you convert $26,000 from the pre-tax to roth.  This will end up with about $2,000 in taxes assuming you are single, don't itemize, and don't have any other income (and no state income tax).  So, you will be adding 1 year of expenses every year to your roth contributions.  They need to vest for 5 years before they can be withdrawn tax and penalty free.  So, for the first 5 years, you need to cover $24,000 living expenses in some combination of withdrawing original roth contributions and non-retirement accounts.  After that, your conversion stream kicks in to cover your expenses. 

So, you'll be slowly drawing down on your $500,000 original pre-tax principal - but it will last you well into normal retirement age where you can then withdraw from either account as you see fit.  At the same time, you shouldn't be touching the roth principal remaining after the first 5 years, so that should continue to grow - leaving your total principal the same.  You've just essentially transferred pre-tax money to post-tax money at a very low overall tax rate during this time period. 

reverend

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Re: Need help finding a tax haven
« Reply #26 on: August 13, 2012, 05:55:46 PM »
Get married.

That usually ends up costing MORE.

joer1212

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Re: Need help finding a tax haven
« Reply #27 on: August 15, 2012, 04:49:32 PM »
Quote
You're right, it will be subject to income tax.  Here's an example.

Assumptions

Annual Expenses: $24,000
Pre-Tax Account Values:  $500,000
Roth Account Values:  $200,000
SWR: 4%

Each year you convert $26,000 from the pre-tax to roth.  This will end up with about $2,000 in taxes assuming you are single, don't itemize, and don't have any other income (and no state income tax).  So, you will be adding 1 year of expenses every year to your roth contributions.  They need to vest for 5 years before they can be withdrawn tax and penalty free.  So, for the first 5 years, you need to cover $24,000 living expenses in some combination of withdrawing original roth contributions and non-retirement accounts.  After that, your conversion stream kicks in to cover your expenses. 

So, you'll be slowly drawing down on your $500,000 original pre-tax principal - but it will last you well into normal retirement age where you can then withdraw from either account as you see fit.  At the same time, you shouldn't be touching the roth principal remaining after the first 5 years, so that should continue to grow - leaving your total principal the same.  You've just essentially transferred pre-tax money to post-tax money at a very low overall tax rate during this time period.


How is this different from simply having taxes taken out from your regular 401k as you slowly withdraw money from it to cover your living expenses? In both cases, you are still paying taxes on that money. You are not circumventing this. You're not even paying a lower tax rate by doing this. Did I miss something?

grantmeaname

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Re: Need help finding a tax haven
« Reply #28 on: August 15, 2012, 06:52:13 PM »
You can't withdraw from your 401k until you're 59.5. That's what you're missing.

joer1212

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Re: Need help finding a tax haven
« Reply #29 on: August 17, 2012, 11:13:18 AM »
Quote
You can't withdraw from your 401k until you're 59.5. That's what you're missing.


I will use the 72(T) rule to withdraw from my 401k

grantmeaname

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Re: Need help finding a tax haven
« Reply #30 on: August 17, 2012, 11:20:00 AM »
That's not a withdrawal, that's a distribution of substantially equal periodic payments. They're different. And the 72(t) rule is problematic because the rate at which you're permitted to withdraw is based on the global banking climate; right now you'd need an incredible amount of money (~$1MM) in your 401(k) to support even a modest ($20k/yr) lifestyle. If you're willing to forego starting your 72(t) payments until interest rates are high, or to work for half of your income, it's totally viable. Otherwise, you're better served with the Roth conversion method.
« Last Edit: August 17, 2012, 11:28:17 AM by grantmeaname »

JohnGalt

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Re: Need help finding a tax haven
« Reply #31 on: August 17, 2012, 11:20:42 AM »
Quote
You can't withdraw from your 401k until you're 59.5. That's what you're missing.


I will use the 72(T) rule to withdraw from my 401k

Usually 72(t) doesn't let you withdraw enough.  Why wouldn't you convert your 401k to an IRA?  You'll likely have more investment options with lower fees and there's no penalty or taxes on converting a 401k to a traditional IRA.  You can then either 72(t) from the IRA if you want or go the annual roth conversion method.  Bottom line - IRA will offer you much more flexibility than the 401k for no real penalty.

joer1212

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Re: Need help finding a tax haven
« Reply #32 on: August 22, 2012, 10:13:41 PM »
That's not a withdrawal, that's a distribution of substantially equal periodic payments. They're different. And the 72(t) rule is problematic because the rate at which you're permitted to withdraw is based on the global banking climate; right now you'd need an incredible amount of money (~$1MM) in your 401(k) to support even a modest ($20k/yr) lifestyle. If you're willing to forego starting your 72(t) payments until interest rates are high, or to work for half of your income, it's totally viable. Otherwise, you're better served with the Roth conversion method.

But, I also have my 457b plan, in addition to my Roth IRA, and my investments outside of my retirement accounts. All my withdrawals will not be coming from my 401k.
I will probably need about $20,000 a year when I retire at age 50 in 7 years. I will probably need to withdraw just $6,000 to $8,000 a year from my 401k using 72(t). The rest will come out of my other accounts and investments.

joer1212

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Re: Need help finding a tax haven
« Reply #33 on: August 22, 2012, 10:23:30 PM »
Quote
Usually 72(t) doesn't let you withdraw enough.  Why wouldn't you convert your 401k to an IRA?  You'll likely have more investment options with lower fees and there's no penalty or taxes on converting a 401k to a traditional IRA.  You can then either 72(t) from the IRA if you want or go the annual roth conversion method.  Bottom line - IRA will offer you much more flexibility than the 401k for no real penalty.


Well, if you can get me fees even lower than what I currently get in my 457b/401k plan, good luck!
Here are my investments in these plans, along with the fees:

10% stable value fund (0.17%)
30% total bond index fund (0.06%)
25% large-cap index fund (0.03%)
9% mid-cap index fund (0.03%)
8% small-cap index fund (0.06%)
18% international index fund (0.12%)

Also, I am very happy with these no-frills index funds. I hate paying marketing and advertising premiums for flashy funds.

JohnGalt

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Re: Need help finding a tax haven
« Reply #34 on: August 23, 2012, 08:25:51 AM »
Quote
Usually 72(t) doesn't let you withdraw enough.  Why wouldn't you convert your 401k to an IRA?  You'll likely have more investment options with lower fees and there's no penalty or taxes on converting a 401k to a traditional IRA.  You can then either 72(t) from the IRA if you want or go the annual roth conversion method.  Bottom line - IRA will offer you much more flexibility than the 401k for no real penalty.


Well, if you can get me fees even lower than what I currently get in my 457b/401k plan, good luck!
Here are my investments in these plans, along with the fees:

10% stable value fund (0.17%)
30% total bond index fund (0.06%)
25% large-cap index fund (0.03%)
9% mid-cap index fund (0.03%)
8% small-cap index fund (0.06%)
18% international index fund (0.12%)

Also, I am very happy with these no-frills index funds. I hate paying marketing and advertising premiums for flashy funds.

Well your 401k certainly has much better options than most.  What provider do you have?  I'm currently trying to get my company to switch 401k providers.  Are you sure there aren't any "hidden" fees being taken out?  Most 401k plans take a % as a management fee.  How easy will it be for you to access the account after you leave employment?

If you're sure 72t distributions will get you what you need and are happy with everything about your 401k, by all means keep your money there.  You could probably even use the roth conversion by just converting the amount you need to an IRA every year before then converting it to a roth IRA. 

joer1212

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Re: Need help finding a tax haven
« Reply #35 on: August 23, 2012, 11:46:39 PM »
Quote
Well your 401k certainly has much better options than most.  What provider do you have?  I'm currently trying to get my company to switch 401k providers.  Are you sure there aren't any "hidden" fees being taken out?  Most 401k plans take a % as a management fee.  How easy will it be for you to access the account after you leave employment?

If you're sure 72t distributions will get you what you need and are happy with everything about your 401k, by all means keep your money there.  You could probably even use the roth conversion by just converting the amount you need to an IRA every year before then converting it to a roth IRA. 

I work for the MTA, New York City Transit, which is a quasi-government agency.
I am not aware of my 401k charging me any "management fees". I thought the whole point of investing in index funds was to avoid these. You mean that most 401k providers charge a management fee in addition to the high management fees charged by the funds themselves?
Also, I never heard of people having trouble withdrawing money from their 401k when they retire. What problems do you mean? My plan is to take out money from, both my 401k and 457b every month. So, if I need $12,000 from these plans I will withdraw $500 a month from each plan. Could I have any problem doing this when I retire?
As for the ROTH conversion, you mean I can first roll over some of my 401k/457b money into a traditional IRA, and then into a ROTH IRA? What is the benefit of doing this, since you still have to pay taxes the moment any money goes into a ROTH? Why not just roll money directly into a Roth?
« Last Edit: August 23, 2012, 11:48:16 PM by joer1212 »

MrSaturday

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Re: Need help finding a tax haven
« Reply #36 on: August 24, 2012, 08:02:15 AM »
You should have recently received a quarterly report on your 401k account.  That report will tell you how much you were charged in maintenance fees by the plan provider.  This is outside of any fees in the individual funds and some or all may be paid by your employer.

JohnGalt

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Re: Need help finding a tax haven
« Reply #37 on: August 24, 2012, 08:31:29 AM »
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Well your 401k certainly has much better options than most.  What provider do you have?  I'm currently trying to get my company to switch 401k providers.  Are you sure there aren't any "hidden" fees being taken out?  Most 401k plans take a % as a management fee.  How easy will it be for you to access the account after you leave employment?

If you're sure 72t distributions will get you what you need and are happy with everything about your 401k, by all means keep your money there.  You could probably even use the roth conversion by just converting the amount you need to an IRA every year before then converting it to a roth IRA. 

I work for the MTA, New York City Transit, which is a quasi-government agency.
I am not aware of my 401k charging me any "management fees". I thought the whole point of investing in index funds was to avoid these. You mean that most 401k providers charge a management fee in addition to the high management fees charged by the funds themselves?
Also, I never heard of people having trouble withdrawing money from their 401k when they retire. What problems do you mean? My plan is to take out money from, both my 401k and 457b every month. So, if I need $12,000 from these plans I will withdraw $500 a month from each plan. Could I have any problem doing this when I retire?
As for the ROTH conversion, you mean I can first roll over some of my 401k/457b money into a traditional IRA, and then into a ROTH IRA? What is the benefit of doing this, since you still have to pay taxes the moment any money goes into a ROTH? Why not just roll money directly into a Roth?

At what age do you plan on retiring?  If it's before 59, you won't be able to just withdraw $12,000 from your 401k because you happen to need it without paying the 10% penalty.  You'll have to set up substantially equal periodic payments - that basically turns your 401k into an annuity with payouts based on your life expectancy and current rates.  This will very likely result in very small annual withdrawals.  I'm sure you could google to find some calculators that will help you estimate the amount.

The benefit of converting to a roth has been outlined above - but it will let you withdraw the amount you need to every year - you'll just need to know how much you'll want to withdraw 5 years in advance. 
You can't just roll directly from a 401k to a roth IRA as far as I know.  You have to first convert the money into a traditional IRA (because it gets the same tax treatment as a 401k) and then you can convert that money to a roth.  Yes you will pay taxes - but see the above examples to see how you will end up paying very little taxes.  Note - you'll also pay taxes when you withdraw from your 401k - as that money is tax deferred, not tax free. 

joer1212

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Re: Need help finding a tax haven
« Reply #38 on: August 24, 2012, 08:57:49 PM »
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At what age do you plan on retiring?  If it's before 59, you won't be able to just withdraw $12,000 from your 401k because you happen to need it without paying the 10% penalty.  You'll have to set up substantially equal periodic payments - that basically turns your 401k into an annuity with payouts based on your life expectancy and current rates.  This will very likely result in very small annual withdrawals.  I'm sure you could google to find some calculators that will help you estimate the amount.


I plan on retiring in 7 years, at age 50. Definitely not later than 52.
Here is what I know about the 72(t) rule:

"After you’ve begun taking your 72(t) distributions, you must continue taking them for 5 years or until you reach age 59˝, whichever comes later. That means that once you’ve begun the payments, you’re locked in for several years. No changing your mind unless you want to deal with penalties and interest.
Once you’ve been taking the payments for 5 years and you’ve reached age 59˝, you can discontinue the payments if you so desire."

This sounds good enough for me.
Don't forget that, in addition to my 401k, I also have a 457b (which I can withdraw from penalty-free whenever I want after I leave my job), a ROTH IRA, from which I can withdraw the principal penalty-free, and of course I have money invested outside of my retirement accounts.

grantmeaname

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Re: Need help finding a tax haven
« Reply #39 on: August 25, 2012, 07:28:03 AM »
It looks like 72(t) withdrawals would work for you, then. But you're retiring relatively late, for this community, and you need your SEPPs to provide only a small portion of your retirement income, so you're an exceptional case and it does not follow that SEPPs are a reasonable option for most or even many in the community. I've already demonstrated why they are not.

joer1212

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Re: Need help finding a tax haven
« Reply #40 on: August 25, 2012, 09:55:13 AM »
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It looks like 72(t) withdrawals would work for you, then. But you're retiring relatively late, for this community, and you need your SEPPs to provide only a small portion of your retirement income, so you're an exceptional case and it does not follow that SEPPs are a reasonable option for most or even many in the community. I've already demonstrated why they are not.

God, I hate to be reminded of how many years I've wasted, and, as a result, I can only retire at 50, at the earliest. I should have been retired by 40. I will be 43 next month.
How early do most people on this site actually retire?
I know many young people want to be retired (and rich) by 30. But 30 was definitely not practical for me, as I was in art school until I was 24.
It took several more years of fumbling before I realized I wasn't going to become successful by painting.
I didn't even get my first well-paying job until I was 36 (I had had only crappy part-time jobs until then). I didn't begin to seriously invest until I was about 39.
 I guess better late than never.

grantmeaname

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Re: Need help finding a tax haven
« Reply #41 on: August 25, 2012, 11:08:54 AM »
I'm sorry. I wasn't trying to rub anything in, or anything of the sort. That wasn't my goal.

I'm just saying that it's easier to make do with a poor financial product like the 72(t) for 7.5 years than it is to do so for 29.5 years.

joer1212

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Re: Need help finding a tax haven
« Reply #42 on: August 26, 2012, 11:33:50 AM »
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I'm sorry. I wasn't trying to rub anything in, or anything of the sort. That wasn't my goal.

I'm just saying that it's easier to make do with a poor financial product like the 72(t) for 7.5 years than it is to do so for 29.5 years.

Oh, no, I didn't take any offense. I'm sorry I made you feel guilty.
I was just publicly expressing my grief for having been so stupid and complacent, and not doing something about my life earlier.  Now I have to retire at a semi-old age.
By the way, I agree that the 72(t) rule may be a little clumsy and impractical for someone retiring, say, at 30. However, 72(t) can work even at that age. You could simply take distributions from your 401k using this IRS rule, and reinvest the excess into an IRA.
Just because you are forced by 72(t) to take money out until you are 59 and 1/2 doesn't mean you have to spend that money.

« Last Edit: August 26, 2012, 12:37:30 PM by joer1212 »

ShavinItForLater

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Re: Need help finding a tax haven
« Reply #43 on: August 26, 2012, 05:05:53 PM »
Just because you are forced by 72(t) to take money out until you are 59 and 1/2 doesn't mean you have to spend that money.

This makes me think you don't really understand the issue.  It isn't that you're forced to withdraw or spend more than you want to--it's that you may not be able to withdraw as much as you need. 

When you annuitize your 401(k) at age 35 for example, the 72(t) rules only allow you to withdraw about 2.7% of the balance per year.  If you are counting on a 4% withdrawal rate and have no other source of funds to fill the gap, you're stuck.  You're also locked into that until age 59 1/2--so if you ever had an emergency in those 25 years, you couldn't get to the additional funds without paying a penalty.  At age 50, the 72(t) allows about 3.5%, a lot closer to 4%.

If you have a massive nest egg, to the point where even a 2.7% withdrawal rate is more than you need, then none of this matters--but that implies some inefficiency in your plan, since you would have to save a lot more than you actually need in order to retire.  Having another source of funds to fill the gap or cover the years to 59 1/2 is probably a better solution in many cases.

If you did have excess forced withdrawals then sure you could re-invest it in an IRA, although technically if you are fully retired with no earned income, then that is not allowed either.  You (or your spouse) need earned income to be able to contribute to an IRA.
« Last Edit: August 26, 2012, 05:08:51 PM by ShavinItForLater »

joer1212

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Re: Need help finding a tax haven
« Reply #44 on: August 27, 2012, 11:43:33 AM »
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This makes me think you don't really understand the issue.  It isn't that you're forced to withdraw or spend more than you want to--it's that you may not be able to withdraw as much as you need. 

Yes, you are right that if your 401k is your only source of income, then 72(t) will not be a good choice for someone retiring really early.
I wrongly assumed that most early retirees would be in a position similar to mine, where I have several accounts and sources of income, not just a 401k.
However, with a currently maximum allowable contribution of only 17k a year in a 401k, I'm wondering how someone can even retire at age 30 with this being the only source of income (even if there was no early withdrawal penalty).
I did the math, and someone who starts contributing the maximum to his 401k as early as 20 years-old (something that few people do at this age) will have only about 213k at age 30 (assuming an average 5% compounded annually, and only 17k contribution/yr. with no raise to the contribution level).
You're going to have to live pretty tight for this money to last another 60 years!
« Last Edit: August 27, 2012, 11:48:37 AM by joer1212 »

grantmeaname

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Re: Need help finding a tax haven
« Reply #45 on: August 27, 2012, 12:35:29 PM »
The employer match gets added to that, so it's a bit higher. You're right, though, that you'll need money outside of your 401k.

Most will have money in taxable accounts and IRAs, and perhaps a fully-owned home, but the point remains that it's best to not rely on the 72t because it's terrible.

JohnGalt

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Re: Need help finding a tax haven
« Reply #46 on: August 27, 2012, 12:43:55 PM »
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This makes me think you don't really understand the issue.  It isn't that you're forced to withdraw or spend more than you want to--it's that you may not be able to withdraw as much as you need. 

Yes, you are right that if your 401k is your only source of income, then 72(t) will not be a good choice for someone retiring really early.
I wrongly assumed that most early retirees would be in a position similar to mine, where I have several accounts and sources of income, not just a 401k.
However, with a currently maximum allowable contribution of only 17k a year in a 401k, I'm wondering how someone can even retire at age 30 with this being the only source of income (even if there was no early withdrawal penalty).
I did the math, and someone who starts contributing the maximum to his 401k as early as 20 years-old (something that few people do at this age) will have only about 213k at age 30 (assuming an average 5% compounded annually, and only 17k contribution/yr. with no raise to the contribution level).
You're going to have to live pretty tight for this money to last another 60 years!

For the most part, I think you're right - it would be difficult to get enough to just use 401k alone. 


However, take this scenario:
$70,000 average income over 10 years. 
Employer matches 100% up to 6% = $21,000 / yr contributions w/ 5% growth = $260,000 in 401k
Add in $5,000 in roth IRA = $60,000
Add in a $100,000 paid for house ($1,000/mo monthly payment on a 10 year loan at 5%).
$320,000 * 4% SWR = $1,000/mo expenses with no house payment

Obviously this isn't 100% 401k, but with only $50,000 in roth contributions that can come out penalty free over 30 years, that's only $140/mo.  I doubt the 72 on $260,000 would give you the other $860/mo - probably more like half that if it allows a 2% withdrawal rate.


sheepstache

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Re: Need help finding a tax haven
« Reply #47 on: October 01, 2012, 09:44:01 AM »
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As far as I understand it, getting from one tax bracket to another doesn't change the rate at which each dollar is taxed. Dropping one dollar from your income to drop you into a lower tax bracket wouldn't really do anything much; only that one dollar was being taxed at the higher rate anyway. But I don't claim to have a strong grasp of tax law, so if there's some kind of non-marginal advantage to shifting tax brackets, could somebody point it out for me?

You know, I didn't think about this.
So, the first 34k of my 42k annual gross income is taxed at 15%? Only $8,000 of my income, then, is taxed at 25%.
But, still, it would be nice to shield this 8k from tax erosion that will cut this money down by a quarter.

Nevinera makes a great point about tax brackets, but I wanted to mention that which bracket you're "in" matters for dividend taxes.  My understanding is if any of your earned income falls in the 25% bracket all your qualified dividends are taxed at 15% rather than 0%.  (If it's the dividends themselves that push you into the bracket, some of them will be at the lower rate some at the higher rate.)  If all your dividend-bearing stuff is in retirement accounts, then it doesn't matter, just thought I'd throw it out there.   Note that this is the result of the Bush tax cut which is temporary but no one is sure for how long.

This article has a bit more background: http://www.thestreet.com/story/11717087/1/last-chance-tax-break-get-your-free-investment-income.html

Only other suggestion I can think of is if you have a young relative you would be giving gifts to anyway you could put cash into a coverdell account in their name.

ps. I live in nyc too; thanks for making the trains run!

joer1212

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Re: Need help finding a tax haven
« Reply #48 on: October 01, 2012, 11:56:50 AM »
Thanks for this info. I was not aware of this at all.  Another reason to avoid touching the 25% tax bracket.