Part time work and the saver's tax credit

[ChaseJuggler]

Combined, we (not married, no kids) make about $90,000 per year and save slightly more than 50% of it. Current net worth of $110,000.

Game plan is to save until our net worth hits $500,000, then transition to part time work earning about $20,000 each per year for expenses while we let the savings compound. Our final FI target will be when this grows to about $1,000,000.

It looks like the saver's tax credit can really help us out. Here's my idea:

• We each earn $23,000 or less per year
• We each contribute enough to our IRA's to put our AGI at exactly $18,500
• Our federal taxes are reduced by $1000 after the 50% match, putting us at about $0 in federal taxes during our part time years!

Can anyone find a reason why this plan won't work? Because from where I'm sitting it looks like a $2,000 per year bonus for working part time.


*These are all in 2015 dollars, for simplicity.*

[Paul der Krake]

Yes.

For even better results, find part time work that offers a 401(k) and lets you contribute lots into it.

As long as your combined AGI remains below $36,500, and you both have earned income to be able to contribute in the first place, and you don't run afoul of the couple gotchas outlined in form 8880, you will be considered full-on paupers by the government.

It's an easy money grab for Mustachians who are progressively winding down their working years.

[dandarc]

The form for the saver's credit looks back for a couple years for IRA distributions.  As I know a lot of folks are planning to use a Roth ladder, you'd need to factor that in if you want to take advantage of the saver's credit - the conversions shouldn't be a problem (except to the extent they increase AGI), but actually taking money out is.

So if there is a shortfall to cover, you need to fund it from somewhere other than the Roth IRA to make this work.

[peoria]

I am doing similar to this currently.

W-2 Income is $39800
max 401k at 18000
employer match at 3.5% $1393
max TIra at 5500- note must be TIra to reduce AGI, not Roth.
AGi is $16300
Bonus, my employer is taking advantage of 401 profit sharing for my annual bonus adding about $10000 of untaxed, no fica, no social security.

My total intake is $51143 with $0 federal taxes, $123 state tax, $3045 soc/fica, and I am eligible for full ACA credits ( making the cheapest marketplace  silver plan for deductible reductions is $43 per month) including deductible reductions ( deductible is $250, annual oop cap is $500). 

This still gives me $13000 to live off of.

[ChaseJuggler]

Thanks for the insight! The amount of financial knowledge on this site is always humbling.

We will definitely follow this path then. A $2000 per year boost makes a huge difference on our numbers. Maybe even enough to quit our full time jobs one year sooner.

[peoria]

You may also want to give yourself a little more wiggle room by staying at little under the 50% cliff for the saver's credit, to allow room for interest income etc.

[dandarc]

You may also want to give yourself a little more wiggle room by staying at little under the 50% cliff for the saver's credit, to allow room for interest income etc.

The beauty of using tIRA's to do this - you don't have to guess at things like this.  You can make or recharacterize your contribution up to April 15th of the following year - after you know your other income exactly.  The big risk is earning too much - where even a maxed out 401K and tIRA won't get you under the cutoff.

[Rosy]

If I read this correctly - the credit would also be applied if all you have is 401K and not an IRA as well?
Is it necessary to max out your 401K then or does it matter?

[Kriegsspiel]

Will need to come back to this thread.

[peoria]

If I read this correctly - the credit would also be applied if all you have is 401K and not an IRA as well?
Is it necessary to max out your 401K then or does it matter?

I am maxing out my 401k and TIra as ways of getting my agi down low enough to get the full 50% saver's credit.  Above $18500 AGI you only get a 20% credit, then 10%, then the credit is gone completely.

Maxing out both is all about lowering the income, if your income is already low enough, you do not have to max out anything.

You do have to contribute some amount of money into any of the retirement vehicles- 401k, Tira, Roth Ira, etc. for this credit to be available at all.

You get the credit based on a % of the lower of $2000 or the amount you contributed.

[peoria]

Will need to come back to this thread.

I am not understanding what you are trying to convey here.
Try the easy way before the hard way, I understand, but I do not understand what it pertains to on this thread?

[Kriegsspiel]

Just posting to follow.

[J Boogie]

I'm fascinated too, the meaning here is not clear at all.  It's a funny GIF though and I'd like to speculate on the meaning.

Maybe he's saying you're being like those two other FBI guys who aren't doing much work but still getting the same outcome.

You're getting rich but not having to work that hard.

I've often thought of doing the same thing, rather than identifying a FIRE date, identifying a coast/neutral date where I won't need to save anymore.  I guess then I'd also want to figure out how many years I would have to coast before starting the draw down. 

[peoria]

Just posting to follow.

Oh, I thought you were making some commentary about the strategy of the OP or myself:)

At first glance, I thought you were saying that what we were doing was borderline illegal ( FBI going over a fence), and I couldn't figure out how you would think that. Ethics of tax planning - I could see as a discussion, but not legality.