Best ways to optimize taxes in retirement savings

[ThunderCats]

I'm trying to figure out the best way to optimize our savings in regards to taxes.  Last year's taxes were exceptionally high... though much of this is because we hadn't planned on having as much income as we did with our blog and hadn't planned accordingly.  I am hoping to avoid repeating that mistake, and am looking for input on how to do this.

Our current streams of income:
1) Public school teaching job
2) Self-employment/blog profits
Total income lands between 100-150k

Our current savings vehicles:
1) each of us have (and max out) a roth IRA
2) a joint brokerage account
3) Teacher pension system (though due to the political climate, and our plans to retire early, we're not sure if this will count for much of anything when the time comes)
Total savings: about half of all income

I've been researching a few different options to try to help.
1) Setting up a 403B (our district does not offer matching, so the sole benefit would be tax deferral)
2) Setting up a solo 401... Though I'm not sure if it's legal to have both a 403b and a 401k... nor am I certain how to set this up.
3) Switching from roth IRA's to traditional IRA's... right now we're being taxed at the 25% bracket... i'm not sure if the traditional would be a greater advantage
4) Investing in real estate... I've always loved the idea of being a land lord, but have no idea how the real estate investments would affect taxes.

Any advice would be greatly appreciated!

[ender]

How are you paid? IE what percentage goes to what? How old are you (over age 50 has different contribution limits)?

It looks like nearly all of your savings are 100% aftertax. You are not really taking much advantage of tax advantaged accounts!


Self employment has a lot of options for retirement accounts.

1) Setting up a 403B (our district does not offer matching, so the sole benefit would be tax deferral)

You can put $18k into this per year, pretax, which will save you probably close to $5000 on taxes (depending on what state you live in).

3) Switching from roth IRA's to traditional IRA's... right now we're being taxed at the 25% bracket... i'm not sure if the traditional would be a greater advantage

https://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

Note that reducing your income with your 403b will help with this.

Also, since your income is variable you can wait until the end of the year to determine if you want to make your IRAs deductible or Roth.

[seattlecyclone]

1) Setting up a 403B (our district does not offer matching, so the sole benefit would be tax deferral)

Tax deferral is a pretty nice benefit all on its own for those in a higher tax bracket!

2) Setting up a solo 401... Though I'm not sure if it's legal to have both a 403b and a 401k... nor am I certain how to set this up.

It's legal to have both, but the combined employee deferral can't exceed $18k between the two accounts. Do note, however, that you can put in 25% of earnings into a solo 401(k) tax-deferred from the employer side above and beyond the $18k limit, so it would be a way to shelter some of your blog income.

Also if your 403(b) plan has bad funds, you may decide to do as much of the $18k as possible into the solo 401(k) instead of the 403(b).

3) Switching from roth IRA's to traditional IRA's... right now we're being taxed at the 25% bracket... i'm not sure if the traditional would be a greater advantage

With Roth vs. traditional, the big question is whether you expect your tax bracket to be higher now or in retirement. The more money you already have in Roth (or taxable accounts, for that matter), the less of your spending during retirement will count as income for tax purposes, which will make it less likely that Roth was the optimal choice!

If your income ends up being low enough to make pre-tax traditional contributions, strongly consider it.

4) Investing in real estate... I've always loved the idea of being a land lord, but have no idea how the real estate investments would affect taxes.

There are some nice tax breaks for landlords, in that you only need to report net income after all expenses (including depreciation and mortgage interest), but it can be a lot of work. Be sure that you're willing to do it before you dive in.

[dandarc]

Perhaps a clearer break-down of who works what jobs would help.  Is it one teaching job, or are you both teachers?  Do you both work on the side business / blog, or is it just one of you?  Post reads like you are married, but doesn't explicitly say that.

Does your district also offer a 457B?  If so, take a real hard look at that.

If you're both teaching and happy with the 403B, and there aren't rules preventing you from deferring the full 18K each, use a SEP-IRA to shelter blog income rather than a soloK.  You get one 18K deferral each combined between all 401Ks and 403Bs combined.  If you defer your 18K at your day job, the SEP-IRA will let you defer just as much as the SoloK and is slightly easier to setup and deal with.

[ThunderCats]

Thanks for the advice so far!  To clarify a little more information, my husband and I are in our late 20's.  He's a teacher, and I'm on maternity leave trying to figure out whether I'm going back part time or staying home to homeschool our children.  So a 403b isn't an option for me at the moment, but will be if/when I go back.  The blog has everything in my husband's name, he does most of the work for it... we debated over looking into getting both our names on it in the past (he likes the idea because it would be easier to ensure me and the kids had income if anything were to ever happen to him), but we weren't sure if we could since it's a sole proprietorship.

We prioritized paying off our house last year (Mission Accomplished!), so we didn't have much we were putting into savings, tax advantaged or otherwise.

I'm not real certain how a 403b works... I'm used to the IRA's we set up and control ourselves... do most 403b's work this way, or are there usually greater restrictions (tomorrow I can call HR to get specifics).

I've never heard of a 457B, I'll check into that as well.

Could someone explain what a SEPIRA is and how it differs from a regular IRA?

Thanks for all of your help!  I'm really new to all of this investing stuff.

[seattlecyclone]

I'm not real certain how a 403b works... I'm used to the IRA's we set up and control ourselves... do most 403b's work this way, or are there usually greater restrictions (tomorrow I can call HR to get specifics).

With a workplace plan, your investment options will generally be limited to whatever your employer benefits department has selected.

Could someone explain what a SEPIRA is and how it differs from a regular IRA?

A SEP IRA is a plan you can set up for your business. You can make an "employer" contribution of 25% of net income, just like with a solo 401(k). This contribution will be above and beyond the standard $5,500 personal IRA contribution.

[BlueLesPaul]

If you're both teaching and happy with the 403B, and there aren't rules preventing you from deferring the full 18K each, use a SEP-IRA to shelter blog income rather than a soloK.  You get one 18K deferral each combined between all 401Ks and 403Bs combined.  If you defer your 18K at your day job, the SEP-IRA will let you defer just as much as the SoloK and is slightly easier to setup and deal with.

The SEP and Solo are similar in that you can have a maximum employer contribution of 25% of your net earnings from self-employment, but the Solo 401(k) can also have an employee contribution of $18,000, where the SEP is limited to the IRA maximum of $5,500.  The total contribution for either a SEP or Solo cannot exceed 100% of compensation, but either way, the Solo will likely be more beneficial as long as you are willing to deal with the administrative hassle.

http://www.obliviousinvestor.com/sep-vs-simple-vs-solo-401k/

https://investor.vanguard.com/what-we-offer/small-business/compare-plans

It does appear that the spouse that owns the business also is the spouse that owns the blog, so the 401(k) and 403(b) maximums will offset each other, but if the Solo 401(k) is certainly worth looking into.  OP should look into opening a spousal tIRA if their AGI does not phase-out its deductibility or a Roth IRA or in taxable accounts if the tIRA is only partially deductible.