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2011 and 2012 tax planning... Roth IRA and Roth 401k
Old 05-01-2010, 12:52 PM   #1
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2011 and 2012 tax planning... Roth IRA and Roth 401k

I need a confirmation I am doing some math right...

wife and I both qualify for Roth IRAs (and both are maxed)
I have a normal 401k at work
wife has choice between normal 401k and Roth 401k.

We usually file taxes at very top of 15% bracket.

2009 return:
AGI $105,799
Taxable income $61,276

15% bracket cap (according to fairmark)
$67900

Question... to me this means I could contribute about $6000 more to Roth 401k and still have the taxable income in 15% bracket.

2008 return:
AGI $105,000 (that is not rounding, it was that exactly)
Taxable income $60,697

15% bracket cap (according to fairmark)
$65,100

My thoughts are I could contribute about $4000 more to Roth 401k and still be in 15% bracket.



Here are 401k summaries for both years
2008 401k wife $6979 (Includes her contribution and the match)
2009 401k wife $3500 (match was discontinued for part of the year)


My question is pertaining to making sure I can do straight addition and subtraction on this (when I change % to Roth 401k, it adds to the AGI and adds to the taxable income) and I don't need to look at percentages of the numbers being added or subtracted.

If you cut the 15% bracket this close, any comments as to how much breathing room to leave?
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Old 05-01-2010, 01:14 PM   #2
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It's not like you're hitting income limits. If you miss the bracket by +$100 then that $100 gets taxed at a the higher rate but every thing else is taxed at the lower rates. Not a big deal.
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Old 05-01-2010, 03:23 PM   #3
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What does TurboTax say?

With a 6-figure AGI, you are in the realm of losing out on some tax-credits and other odds-and-ends.

I always buy TurboTax over Thanksgiving weekend and make a preliminary run of my tax return with a few "What ifs?". We then have 6 paychecks (3 of mine, 3 of my spouse) to adjust things. For example, your wife could have 90% of her December paychecks go into her Roth 401(k) if needed.
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Old 05-02-2010, 11:08 AM   #4
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thx for replies

LOL I was LOL at your comment
Quote:
What does TurboTax say?
I prefer knowing the math, then verifying if turbo tax (or another software) calculates it right. TT made some errors on my 2008 return in regard to HSA which taught me that lesson (check my posts when I filed 2009 taxes a few months ago).

Two issues related to this
1) wife might be getting a promotion (so a raise might be kicking in)
2) wife only puts in about 8% of "low salary", so adjusting 6 pay checks of a low contribution isn't going to put $4000 into the Roth over 12 weeks.
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Old 05-02-2010, 11:12 AM   #5
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You asked about breathing room. If your wife switched from 8% to 100% for the last 3 paychecks, would that cover the breathing room?

How about your last 3 paychecks? Got any breathing room there?
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Old 05-02-2010, 11:14 AM   #6
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Quote:
Originally Posted by Animorph View Post
It's not like you're hitting income limits. If you miss the bracket by +$100 then that $100 gets taxed at a the higher rate but every thing else is taxed at the lower rates. Not a big deal.
I look at this a little differently.

If my tax rate changes, the Roth contributions are going in at the higher tax rate.

Meaning if we are putting in 10k into Roth IRA at 15% bracket, that is $1500 in taxes owed.

If we are putting 10k into Roth at 25% bracket that is $2500 in taxes owed.

I realize we only pay the $2500 if we are over the bracket cap by 10k (if we are over by $100 its only $25). Then all that additional income which is slowly building in cash accounts and taxable accounts also gets a higher tax (capital gains and interest start getting taxed more) so I would prefer to avoid 25% bracket if at all possible (and its clearly possible, its just how close do I want to cut it).

My goal would be to be within 10k of the bracket cap (like 2008 and 2009) and being within 5k is better if I can do it without losing sleep over and moving into 25% bracket. I don't think trying to get to within $100 or $500 of the bracket cap is reasonable...
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Old 05-02-2010, 11:20 AM   #7
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Quote:
Originally Posted by LOL! View Post
You asked about breathing room. If your wife switched from 8% to 100% for the last 3 paychecks, would that cover the breathing room?

How about your last 3 paychecks? Got any breathing room there?
I would have to check her plan rules to see if 100% was allowed... I don't have access to that (necessarily- unless its on the web site) and wife is less interested in finding it out for me (this is my domain).
I prefer to be steady state, do the same thing every week and every month, but the opposite of what you suggested is a great idea.

Use the Roth 401k up to October
then see how close we are to 25% bracket cap
then use normal 401k the last 6 pay periods if it appears we are cutting it too close.

My 401k contribution percentage is much higher than wife's, and I gross about 20-30k more than she does. I would have to check my percentage, but I believe its between 12 and 15% right now. Increasing my 401k by even a single percentage would drop taxable income by about $7000 per year or about $135 per week. My wife's percentage would not have the same impact over such a short time period.
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