Now Maxing out of all Tax-Advantaged Accounts!

[bearkat]

This is the board where you get to shamelessly brag on yourself, right?

Little background:
DW was working part-time until this calendar year when she got upgraded to full-time, and with that, she is now able to contribute to her non-profit's 403b account. She was hesitant to contribute much (much less max it out) since we have such a high percent of our net worth in "retirement" accounts.

Now:
After forwarding her posts from MMM and Madfientist didn't seem to convince her, I laid off for a few weeks. Last weekend, we're doing our taxes on TurboTax:

DW: Dang, we pay so much in taxes
Me: Tis true, but this is just the effective tax rate. The marginal tax on the "last dollar" earned is actually taxed WAY HIGHER (at least partially thanks to living in CA).
DW: That sucks! What can we do?
Me: Move.
DW: no really
Me: Well ... we could max out your new 403b and defer $18,000 and save a TON on our taxes next year.
DW: Let's do it!

A few clicks later, we are now maxing out her 403b in addition to her ROTH IRA, my 401k, my ROTH IRA, and an HSA.

Woo!

[Zamboni]

Well done!

[Ed Mills]

Oh yeah!  It's amazing how much money you save and how little tax you pay, when you pay yourself first to the extreme.  Nicely done...consider me a fan!  Keep on hammering.  Ed

[Sid Hoffman]

High 5's!  That's awesome, and how wonderful that your DW agreed to it without hesitation, at least from how you're describing it.  I imagine you're going to have many, many good years ahead of you, and reach FI before you know it, at which point work becomes an entirely for your own enjoyment venture.

[Exflyboy]

Excellent!

[gluskap]

Congrats! We are finally doing the same this year too except we don't qualify for roth so just putting it in tIRA and don't have access to HSA. Only wish we had more tax advantaged space!

[ninjaneer]

Would it be an even better tax situation to contribute to traditional IRAs during your working time and convert to Roth later?

Awesome job on maxing everything!

[Candace]

I just discovered the 72(t) exception to the 10% penalty usually charged for withdrawals on tax-deferred retirement accounts before age 59 1/2. If you take "substantially equal" distributions for at least five years, or until you turn 59 1/2, you can avoid the 10% penalty. So, I re-maxed out my 401(k) and reduced my investments in taxable accounts. (I had previously reduced my 401(k) contributions and increased my taxable account contributions, because I thought I would need more taxable money so I could access it before 59 1/2 when I retire without the penalty.)

See this article: http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx
The 72t Rule Explained - Early IRA Withdrawals Penalty Free

There are three ways to figure the withdrawals you would make. You have to fill out some forms, and you're locked in to the withdrawals even if the market tanks. But this was a happy find for me. Now I can use my IRA before I'm 59 1/2, in pretty much exactly the way I'm going to want to use it, without the penalty. Rejoicing!

[Gone Fishing]

Would it be an even better tax situation to contribute to traditional IRAs during your working time and convert to Roth later?

Awesome job on maxing everything!

+1!

[Gone Fishing]

I just discovered the 72(t) exception to the 10% penalty usually charged for withdrawals on tax-deferred retirement accounts before age 59 1/2. If you take "substantially equal" distributions for at least five years, or until you turn 59 1/2, you can avoid the 10% penalty. So, I re-maxed out my 401(k) and reduced my investments in taxable accounts. (I had previously reduced my 401(k) contributions and increased my taxable account contributions, because I thought I would need more taxable money so I could access it before 59 1/2 when I retire without the penalty.)

See this article: http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx
The 72t Rule Explained - Early IRA Withdrawals Penalty Free

There are three ways to figure the withdrawals you would make. You have to fill out some forms, and you're locked in to the withdrawals even if the market tanks. But this was a happy find for me. Now I can use my IRA before I'm 59 1/2, in pretty much exactly the way I'm going to want to use it, without the penalty. Rejoicing!

Have you heard of the IRA ladder?

Read the Traditional vs ROTH link in my signature line below...

[Candace]

Holy crap, that is mind-bending. I just gave it a cursory read. I'll go back for a more in-depth read soon, though.

Thanks for the link. This is territory I had never explored before.

[bearkat]

Would it be an even better tax situation to contribute to traditional IRAs during your working time and convert to Roth later?

Awesome job on maxing everything!

+1!

If our traditional IRA contributions would be deductible ... I would definitely go that route. The way I understand it for MFJ & both have a retirement plan at work:
(taxable income) - (pre-tax 401k/403b contributions) > $118,000 --> no deduction for you

Are there any other deductions (besides workplace contributions) to your income to get a MAGI below $118k for a partial deduction (preferably below $98k for a full deduction)?

[rocketman48097]

Would it be an even better tax situation to contribute to traditional IRAs during your working time and convert to Roth later?

Awesome job on maxing everything!

+1!

If our traditional IRA contributions would be deductible ... I would definitely go that route. The way I understand it for MFJ & both have a retirement plan at work:
(taxable income) - (pre-tax 401k/403b contributions) > $118,000 --> no deduction for you

Are there any other deductions (besides workplace contributions) to your income to get a MAGI below $118k for a partial deduction (preferably below $98k for a full deduction)?

There are, but they aren't very good.  Moving expenses are deductible, as is student loan interest up to $2500 per year.  The main vehicle to lower AGI is work retirement accounts and tIRA's.  I wish the answer were different.  Although may I suggest NOT doing the Roth IRA's and going with taxable investments instead?

Since dividends and cap gains are taxed at 0% in the 15% federal bracket, once you retire early, you will be able to take this money out, free of tax, and penalty free.  The Roth IRA has too many age restrictions, in my opinion, is not worth it at all anymore.

[jmusic]

Also note that work contributions lower your MAGI, so upping 401K contributions can enable the tIRA deduction when you wouldn't otherwise.  I did this for 2014, recharacterized my Roth contribution,  and got a tax refund of $3800.

[dandarc]

Also note that work contributions lower your MAGI, so upping 401K contributions can enable the tIRA deduction when you wouldn't otherwise.  I did this for 2014, recharacterized my Roth contribution,  and got a tax refund of $3800.

Need to get on that myself - ~$1900 added to tax refund once we recharacterize and file.

[Sid Hoffman]

There are, but they aren't very good.  Moving expenses are deductible, as is student loan interest up to $2500 per year.  The main vehicle to lower AGI is work retirement accounts and tIRA's.  I wish the answer were different.  Although may I suggest NOT doing the Roth IRA's and going with taxable investments instead?

Since dividends and cap gains are taxed at 0% in the 15% federal bracket, once you retire early, you will be able to take this money out, free of tax, and penalty free.  The Roth IRA has too many age restrictions, in my opinion, is not worth it at all anymore.

I like your thinking, but your optimism may be misplaced.  Tax code for capital gains and dividends gets changed all the time.  Just because today you can claim 0% tax as long as the rest of your income is in the 15% bracket doesn't mean that will be the case in another 10, 20, or 50 years.  However, it's unlikely that they will change the rules for Roth accounts.  Or if you'd rather see it worded this way: the government will start taxing all capital gains and dividends before they come after Roth money and start taxing distributions from those accounts.  I still see the Roth accounts as useful, but yeah, at least in today's tax structure post-tax accounts are still very useful if you stay in the 15% bracket and can restrict your gains to being long-term and dividends.

[rocketman48097]

There are, but they aren't very good.  Moving expenses are deductible, as is student loan interest up to $2500 per year.  The main vehicle to lower AGI is work retirement accounts and tIRA's.  I wish the answer were different.  Although may I suggest NOT doing the Roth IRA's and going with taxable investments instead?

Since dividends and cap gains are taxed at 0% in the 15% federal bracket, once you retire early, you will be able to take this money out, free of tax, and penalty free.  The Roth IRA has too many age restrictions, in my opinion, is not worth it at all anymore.

I like your thinking, but your optimism may be misplaced.  Tax code for capital gains and dividends gets changed all the time.  Just because today you can claim 0% tax as long as the rest of your income is in the 15% bracket doesn't mean that will be the case in another 10, 20, or 50 years.  However, it's unlikely that they will change the rules for Roth accounts.  Or if you'd rather see it worded this way: the government will start taxing all capital gains and dividends before they come after Roth money and start taxing distributions from those accounts.  I still see the Roth accounts as useful, but yeah, at least in today's tax structure post-tax accounts are still very useful if you stay in the 15% bracket and can restrict your gains to being long-term and dividends.

Actually, the tax code rarely gets changed for dividends and cap gains, not all the time.  The changes over the last 20 years have almost all been positive for middle to lower income taxpayers.  So I have to disagree with that comment.  Also, in the 25% tax bracket or lower, you are in the sweet spot of voters, politicians will try to do nothing to piss you off.  So the likelihood of these rates going up is pretty much zero.  When I started investing, cap gains was 15% for me, in the 15% bracket.  So I am better off than when I was 18, 20 years ago. 

One other thing to consider is, if you are frugal, how much money do you really need in a Roth?  Remember, you can't get at earnings without a penalty until almost 60.  You might be thinking, I don't have much in a Roth, but trust me, if you forecast that number out, with a 10% compounded year return in the market until age 60, you might fall out of your chair.  If you plan to retire early, after tax investing (with tax loss and gain harvesting) is the only way to go, while simultaneously converting tIRA's to Roth IRA's.  In spite of not adding anymore money to my Roth, I will still have tons of Roth money by age 60.