Author Topic: Woohoo! For the 1st time Maxed out 401k and Wife and I's IRA! 35% of our income!  (Read 2849 times)

FamVestor

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Super excited this year, as I've been trying to do it for a while. But was finally able to maxout both her Roth and mine and my works TSP(401k).

I only make $85k as a federal civilian engineer in the NYC area, and my Wife is a stay at home Mom with two little ones, so I think its a significant accomplishment.

Also super excited to have an effective tax rate of 12%!

pachnik

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Oh, man!  I can sense your excitement over the internet!  Congratulations!!!!

radram

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Congratulations! Maxing out retirement savings is THE BEST!

Are you talking about your TOTAL effective tax rate, or your federal income tax rate. Total tax rate of 12% would be awesome. Your effective federal income tax rate should be less than half that. Here is a dated example:

http://www.richmondsavers.com/how-a-family-of-four-with-a-100000-yearly-income-pays-only-6400-in-federal-income-tax/


moof

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Congratulations!

Out of curiosity, why Roth's?  At that income you should be able to do traditional contributions for both to save on some taxes.

nouveauRiche

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Awesome!  You go!

FamVestor

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    • FamVestor
Congratulations! Maxing out retirement savings is THE BEST!

Are you talking about your TOTAL effective tax rate, or your federal income tax rate. Total tax rate of 12% would be awesome. Your effective federal income tax rate should be less than half that. Here is a dated example:

http://www.richmondsavers.com/how-a-family-of-four-with-a-100000-yearly-income-pays-only-6400-in-federal-income-tax/

Well I was a little confused about that myself, because I thought effective tax rate was simply the amount of taxes you pay divided by income. And federal taxes we paid $4665, and state we paid $1523

So $6288/$85000 would be 7.4%

But when I was looking at my tax return which was done by a CPA they have a calculation for effective tax rate and the report said: 12.85%

Then I read on Investopedia: "An individual's effective tax rate is calculated by dividing total tax expense from line 63 of his 1040 Form by his taxable income from line 43 of that form."
So that would be: $4,665/$43,360= 10.7%

So still kind of confused what number to use...


FamVestor

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Congratulations!

Out of curiosity, why Roth's?  At that income you should be able to do traditional contributions for both to save on some taxes.

So I just wrote an entire blogpost on why I prefer the Roth, but I will condense my main reasons:

The main reason that I think a Roth IRA is better than a traditional IRA is that you can withdraw your contributions penalty-free from your Roth IRA at any point. For a more in-depth look at IRA withdrawal rules, check out this link from vanguard https://investor.vanguard.com/ira/ira-distribution-rules .

Let’s say you put in $5000 yesterday, and today you find an incredible real estate property(I am a real estate investor, currently own and live in a four family, and have an offer in on a three family) that requires a $5000 down payment. You can withdraw that money penalty-free.

Tip: Even though withdrawals are penalty free, you are only able to contribute $5,500 a year. You don’t necessarily want to penalize yourself by withdrawing the $20k which took you 4 years to store. However, the IRS will allow you to return any amount you withdraw as long as you do it within 60 days. Keep in mind this is considered a roll-over and can only be done once every 12 months.

You are limited to only putting $5500/year into an IRA, but $5,500 a year after taxes is like condensed money and worth a lot more than before-tax dollars. So you are effectively able to contribute more.

If your work offers you a retirement plan(401k/403b), you are restricted from contributing to a traditional IRA if your Modified Adjusted Gross Income is over $62k[single]/$99k[married]. As opposed to Roth-IRA limitation starting at $118k[single]/$186k[married].

So I know a lot of Mustachians like the idea of the Roth conversion ladder strategy, but honestly, I want there to always be cash flowing in even after I retire, whether that be rental income, or money from my AmazonSeller fBa business, or another entrepreneurial venture I come up with. So I don't want to bank on me being poor to take advantage of the conversion ladder when I retire.

Anyway would love to hear feedback on my reasoning. And Moof this year instead of contributing to a traditional tsp(401k), I'm switching to Roth TSP(401k) because I had another baby and I plan to close on another investment property which will need a lot of initial capital Improvements. Probably again placing me with a low effective/marginal tax rate. 
« Last Edit: April 10, 2017, 08:46:22 PM by FamVestor »

facepalm

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Super excited this year, as I've been trying to do it for a while. But was finally able to maxout both her Roth and mine and my works TSP(401k).

I only make $85k as a federal civilian engineer in the NYC area, and my Wife is a stay at home Mom with two little ones, so I think its a significant accomplishment.

Also super excited to have an effective tax rate of 12%!
That is fantastic. Congrats!

radram

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Congratulations! Maxing out retirement savings is THE BEST!

Are you talking about your TOTAL effective tax rate, or your federal income tax rate. Total tax rate of 12% would be awesome. Your effective federal income tax rate should be less than half that. Here is a dated example:

http://www.richmondsavers.com/how-a-family-of-four-with-a-100000-yearly-income-pays-only-6400-in-federal-income-tax/

Well I was a little confused about that myself, because I thought effective tax rate was simply the amount of taxes you pay divided by income. And federal taxes we paid $4665, and state we paid $1523

So $6288/$85000 would be 7.4%

But when I was looking at my tax return which was done by a CPA they have a calculation for effective tax rate and the report said: 12.85%

Then I read on Investopedia: "An individual's effective tax rate is calculated by dividing total tax expense from line 63 of his 1040 Form by his taxable income from line 43 of that form."
So that would be: $4,665/$43,360= 10.7%

So still kind of confused what number to use...

Thank you for clarifying. I like your original calculation the best. Here is what I made, here was my tax. In my opinion, that should be the effective rate with regard to federal tax. How in the world can you make $85,000 and claim to make only $43,300. That just sounds silly to me.

FamVestor

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  • Posts: 25
  • Age: 33
  • Location: Garfield, NJ
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    • FamVestor
Super excited this year, as I've been trying to do it for a while. But was finally able to maxout both her Roth and mine and my works TSP(401k).

I only make $85k as a federal civilian engineer in the NYC area, and my Wife is a stay at home Mom with two little ones, so I think its a significant accomplishment.

Also super excited to have an effective tax rate of 12%!

So
$85k
- $18K(401k/TSP)
- $12,600(Standard Married deduct)*
- $12,150(3 exemption(Married with one(now 2) child at the time) x $4,050)
=~$43k

*I used the standard deduction to simplify above, in actuality we itemized, but that number was not too far off

radram

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Super excited this year, as I've been trying to do it for a while. But was finally able to maxout both her Roth and mine and my works TSP(401k).

I only make $85k as a federal civilian engineer in the NYC area, and my Wife is a stay at home Mom with two little ones, so I think its a significant accomplishment.

Also super excited to have an effective tax rate of 12%!

So
$85k
- $18K(401k/TSP)
- $12,600(Standard Married deduct)*
- $12,150(3 exemption(Married with one(now 2) child at the time) x $4,050)
=~$43k

*I used the standard deduction to simplify above, in actuality we itemized, but that number was not too far off

That is what I find so silly. You made 85k. Federal taxes of $4665. Just because we jump through hoops to get our AGI down does not mean we did not make the money. You played by the rules to get your tax bill significantly lower than the posted tax rate in the tax table. I do the same thing. Great for you and great for me. I see this as an effective federal tax rate of 5.48%.