Author Topic: retirement contributions to lower taxable income - getting to 15% bracket  (Read 6785 times)

spokey doke

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I've been asleep at the wheel and looking to wake up...I participate in my employer's optional 401k with match, max out both of our IRA's every year, and have a supplemental 457b  account (not yet at the max), and the wife just recently added a supplemental 403b to her retirement plan at work (not close to max).

So...I'm at around 67K/yr and she is at 61k/yr in income - and that 128K of gross income would generally put us squarely into the 25% tax bracket - even with standard deductions and exemptions, we are just down to 107K (not yet including any reductions for retirement plan contributions).  BUT if we both max out all our pretax contribution options, I think we should get down into 15% bracket territory (barring excessive money making in the market on our taxable accounts).

I just want to bounce the idea off of everyone's upper lip, and try to get a clear answer on whether I can put 18K in my 457b and another 18k in my 401k every year, or if 18k is the total limit for pretax retirement account contributions from my salary.  If the former, and if the wife also maxes her 403b, that combined 54k off the top should do the trick quite nicely.  Am I dreaming???
« Last Edit: February 07, 2015, 07:32:06 PM by spokey doke »

overlord34

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #1 on: February 07, 2015, 07:33:40 PM »
No you're absolutely correct.  This is what I do (max out 457 AND 401k at 18k each for total 36k).

spokey doke

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #2 on: February 07, 2015, 08:21:51 PM »
smelling the coffee...AND that would mean we would then just pay 0% on capital gains in our taxable account, along with lower taxes on the other income. 

Holy shit that could be big savings!
« Last Edit: February 07, 2015, 08:29:57 PM by spokey doke »

Cheddar Stacker

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #3 on: February 07, 2015, 08:38:40 PM »
If you take it a few steps further you can go lower:

http://rootofgood.com/make-six-figure-income-pay-no-tax/

terran

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #4 on: February 07, 2015, 08:39:55 PM »
You only pay 0% on capital gains and dividends until that income pushes you back into the 25% bracket. Then everything within the 25% bracket is still taxed at 15%.

MDM

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #5 on: February 07, 2015, 08:41:54 PM »
smelling the coffee...AND that would mean we would then just pay 0% on capital gains in our taxable account, along with lower taxes on the other income. 

Holy shit that could be big savings!
You pay 0% on qualified dividends and capital gains that, together with your ordinary income, add up to no more than $74,900 for MFJ.

You don't get unlimited free capital gains just because the ordinary income alone would keep you in the 15% bracket (as terran also just said).

spokey doke

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #6 on: February 07, 2015, 08:51:00 PM »
smelling the coffee...AND that would mean we would then just pay 0% on capital gains in our taxable account, along with lower taxes on the other income. 

Holy shit that could be big savings!
You pay 0% on qualified dividends and capital gains that, together with your ordinary income, add up to no more than $74,900 for MFJ.

You don't get unlimited free capital gains just because the ordinary income alone would keep you in the 15% bracket (as terran also just said).

That is what I was assuming...so it is possible that big years in the market could get us over the 74,900 limit
« Last Edit: February 07, 2015, 09:19:24 PM by spokey doke »

spokey doke

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #7 on: February 07, 2015, 09:12:15 PM »
If you take it a few steps further you can go lower:

http://rootofgood.com/make-six-figure-income-pay-no-tax/

that is one of the things that got me going on this

Calvawt

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #8 on: February 08, 2015, 09:52:49 AM »
I have access to both a 403b and a 457b plan as well.  Just remember that a 457b plan does not have the same safety as a 403b.  It is deferred compensation, not a retirement account.  It is definitely useful for those trying to retire early!


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spokey doke

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #9 on: February 08, 2015, 11:54:44 AM »
So what are the downsides of maxing out our retirement/deferred compensation options to get into a lower tax bracket now? 

I'm really attracted by the combination of tax deferred gains, and lower taxes on income and gains now--it seems like a no brainer if you can pull it off (and we have enough cash on the side to supplement the reduced income now). I also can't imagine being in a higher tax bracket in retirement.

Michread

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #10 on: February 08, 2015, 12:13:41 PM »
So what are the downsides of maxing out our retirement/deferred compensation options to get into a lower tax bracket now? 



The age at which you can draw the money without penalty may not work for you.  Check with your work benefits manager for the details. 

My dh's 403b is available at 55 yrs old which is only 2.5 yrs for him which at this point is when he's planning to retire (after 20 yrs at this job).  We saved about $5,000 in taxes for 2014 because of the 403b (when he opened & maxed 403b). We will be living on about half in retirement of what he's bring in with his salary now.  So there are no downsides for us.

Thanks again to Root of Good! 

Psychstache

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #11 on: February 08, 2015, 01:22:27 PM »
Yes, you can contribute to both.

We fell short last year, but my goal for 2015 is to max both my and my wife's 403bs, 457s, and HSAs for a whopping $78,600 in deferred savings.

Still did good this year by dumping lots of money into these, which got our effective tax rate down below 3% on six figures of income.

Definitely take advantage of this.

KD

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #12 on: February 08, 2015, 02:16:11 PM »
Be sure to check out Ed Mills (here on MMM) and on his blog Millionaire Educator.  He's doing something very similar.

spokey doke

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #13 on: February 08, 2015, 03:03:05 PM »
I'm all over this. 

I'm filing now to max my 457, and my wife will max her 403b this year too.

Currently, I have a message in to the retirement account rep., with the question of how to increase my 401k contributions, since at present, there is just an election form, and if you are in, you are in for 7% automatically, with a 9% employer match.  My 7% is WELL below the 18k limit, so we shall see...

Cheddar Stacker

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #14 on: February 08, 2015, 03:45:00 PM »
Spokey, the downside is tax on the withdrawals. But if you retire early enough you will have plenty of time to slowly move enough out and pay very little tax. Or no tax depending on your situation.

If I had access to two accounts i'd max them both and never look back.

spokey doke

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #15 on: February 10, 2015, 08:34:24 AM »
So I heard back from our TIAA-CREF rep, who said our pension law says that if participate in our 401k, that commits me to contributing about 7% and gets a 9% match.  That amount can't be altered or increased, so is not considered by of my voluntary contributions (even though we can choose to participate or not).

That leaves open up to 18k that can go into a 457 AND 18k that can go into a 403b.  So I can be making pre-tax contributions to 3 different accounts, totaling over 40k (and I'm not in the over 50 category yet).

ShoulderThingThatGoesUp

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #16 on: February 10, 2015, 08:47:16 AM »
This is my plan, though our income isn't as high as yours so it's pretty easy. But this year we recorded over $10,000 in capital gains.

PathtoFIRE

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #17 on: February 10, 2015, 08:54:31 AM »
Yeah, 403b and 457 accounts on top of 401k is an awesome combination, please take advantage of those (I wish I had the option!).

There were two things I wanted to point out just to be sure that you have everything straight.

First of all, just understand that there is nothing all that magical about "just getting into" the 15% tax bracket, your taxes will be almost identical whether you are $1 below or $1 above, some people misunderstand the idea of marginal rates, etc. And the same goes for qualified dividends and long term capital gains, if your salaried income minus deductions and exemptions (before dividends and cap gains) just barely puts you in the 15% tax bracket, you're not going to pay $0 taxes on those dividends and cap gains once you add them in. In other words, your salary plus those needs to all be within the 15% bracket. But even if just a portion pushes you over, you only pay the capital gains tax rate on only that portion.

Second of all, you mentioned something about in a great market year you might see a lot of gains, etc. I just wanted to point out that when dealing with mutual funds at least, there are two different kinds of gains that you can realize. First, the funds have to trade throughout the year to some extent, and while many of the low fee index funds are good about avoiding these, the funds themselves may realize capital gains that they will pass on to you. You will have to factor these into your taxes for that year, but again it's typically small or zero, and only relates to holdings in after tax accounts. However, you do not pay any taxes on the actual appreciation or "capital gain" of your stocks/bonds/mutual funds until you sell something and actually _realize_ those gains. So in your accumulation phase, you will probably do little or no selling at all, and while the value of your holdings will rise, you do not pay any taxes.

My apologies if this is already all known to you, but I just got a hint that maybe you didn't.

skyrefuge

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #18 on: February 10, 2015, 10:47:03 AM »
First of all, just understand that there is nothing all that magical about "just getting into" the 15% tax bracket, your taxes will be almost identical whether you are $1 below or $1 above, some people misunderstand the idea of marginal rates, etc.

Yep, I was sensing the same misunderstandings, and read the whole thread waiting for someone to point them out so I wouldn't have to. Thanks for finally taking care of that for me; excellent post!

spokey doke

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #19 on: February 10, 2015, 12:43:22 PM »
I do understand, and thanks for being clear and thorough.

I still think it is helpful to be a bit goal oriented (let's get our taxable income down to the next lower bracket!) in order to get it done, even though being on either side of the threshold may make little difference in a given year.  And even if the amounts may be small, the idea of lower rates on any income has an appeal.
« Last Edit: February 10, 2015, 12:53:22 PM by spokey doke »

RootofGood

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Re: retirement contributions to lower taxable income - getting to 15% bracket
« Reply #20 on: February 10, 2015, 06:04:23 PM »
Thanks again to Root of Good!

You're welcome!  :)