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how to tax defer more $$
Old 02-01-2010, 02:38 PM   #1
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how to tax defer more $$

Newbie question here inspired by posters who assume millions in the 401(k)/Roth accounts: for those of us that don't have our own business, what options do we have to get more money into tax-advantaged accounts beyond:

(1) ~16.5k/year limit in 401(k)
(2) ~5k/year IRA
(3) catch up contribution to above if you are older than certain age
(4) I heard some companies offer non-qualified contributions to 401(k) after the initial 16.5k limit, but apparently many companies don't.

At ~20k/year rate, it seems like a long time to accumulate a million or two in the account, unless your rate of return is high.

What are some other ways? Am I missing some obvious ones?

Thanks!
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Old 02-01-2010, 03:26 PM   #2
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If you have a health savings account (HSA) you can stash cash there. Also if you have a spouse, you can defer money in their name. Annuities are another possibility, but I won't mention them.
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Old 02-01-2010, 04:05 PM   #3
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We don't have millions in our tax-deferred accounts. Note the use of the word "We".

If you want to double your eligible deferral, then get married to someone who works. And try to find a company that has a substantial matching policy.

Other than that, you can perhaps try one of those variable annuity things. I read that Vanguard sells them.

But you can invest tax-efficiently in an after-tax brokerage account. There are no contribution limits. You can take the money out anytime you want. If you die, your heirs get the stepped up basis. Dividends are taxed at special low rates -- as low as 0%.
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Old 02-01-2010, 04:09 PM   #4
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Annuities... if you dare. I-bonds also.
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Old 02-01-2010, 04:23 PM   #5
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Annuities... if you dare. I-bonds also.
Aren't Series EE Savings Bonds also tax deferred (IOW you don't pay tax until you cash them)?
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Old 02-01-2010, 04:32 PM   #6
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Aren't Series EE Savings Bonds also tax deferred (IOW you don't pay tax until you cash them)?
I think you have a choice, pay now or pay later.
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Old 02-01-2010, 06:36 PM   #7
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Although the premiums are paid with after tax dollars, a whole life insurance policy (if paid up in not less than 7 years) allows you to defer tax on the earnings. Crediting rate, mortality charges and commissions will determine if this is worthwhile.
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Old 02-01-2010, 06:44 PM   #8
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Originally Posted by smjsl View Post
Newbie question here inspired by posters who assume millions in the 401(k)/Roth accounts: for those of us that don't have our own business, what options do we have to get more money into tax-advantaged accounts beyond:
(4) I heard some companies offer non-qualified contributions to 401(k) after the initial 16.5k limit, but apparently many companies don't.
For number 4) above the contributions are non-qualified but any earnings in this case would be qualified funds subject to normal income tax upon withdrawal.

Per the IRS, If your plan allows it you and your company's match together could put in up to a sum total of $49000.0 (for 2010) into the 401k.
However only the company match and the ($16.5k plus possible (over-50) catchup of $5.5k) are tax deferrable.

Something else to consider...

Some people don't want to put non deductable money in a 401k because when you take earnings out they will be taxed at the (higher) income tax rate as opposed to long term capital gains rates. Good luck predicting income tax rates, captital gains rates, and (possible) 401k-fair share tax rates some decades out though.
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Old 02-01-2010, 06:51 PM   #9
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I saw that USAA offers something called a "savings annuity". It sounds like a tax-deferred CD (up to 10 year deferral) though no FDIC insurance.
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Old 02-01-2010, 07:24 PM   #10
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.......................
Something else to consider...

Some people don't want to put non deductable money in a 401k because when you take earnings out they will be taxed at the (higher) income tax rate as opposed to long term capital gains rates. Good luck predicting income tax rates, captital gains rates, and (possible) 401k-fair share tax rates some decades out though.
I'm not sure how long it will last, but in some cases you can now roll those after tax 401(k) contributions over to a Roth. I mentioned this in another thread.
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Old 02-01-2010, 07:48 PM   #11
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I'm not sure how long it will last, but in some cases you can now roll those after tax 401(k) contributions over to a Roth. I mentioned this in another thread.
Do you have a reference to this, that would be very interesting.

You aren't by chance thinking of designated Roth 401k accounts (ie. Roth 401k) being rolled over to a Roth IRA. That's different than what you posted.
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Old 02-01-2010, 07:50 PM   #12
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At ~20k/year rate, it seems like a long time to accumulate a million or two in the account, unless your rate of return is high.
If you are married and both over 50 you can put away 56K a year in a 401K plan. Plus if both spouses have employer matching that can add quite a bit more. Plus as you mentioned some plans allow after tax contributions. Then there are non IRAs for 12K a year if you are both over 50.

It is even better if you are over 50, married and have your own business 401K plan where you can add a portion of the business profits to the mix.
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Old 02-01-2010, 08:13 PM   #13
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I think you have a choice, pay now or pay later.
TJ
I believe you are correct, the taxes can be either "pay as you go" or "pay when the bond is cashed". However the option of paying the tax later gives another opportunity for tax deferral in addition to I bonds. There is a limit on Savings Bond purchases, but it is a limit on the amount of each series, not on Savings Bonds of all series. If I understand this link correctly, one may buy $5000 worth of each series in paper, plus another $5000 of each series via Treasury Direct, or a total of $20K, per person, per year. I think Savings Bond purchases would be more or less equivalent to non-deductible IRA or non-qualified 401K contributions--the face value is paid for with after-tax money, and the earnings are taxed later as regular income.
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Old 02-01-2010, 08:20 PM   #14
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Do you have a reference to this, that would be very interesting.

You aren't by chance thinking of designated Roth 401k accounts (ie. Roth 401k) being rolled over to a Roth IRA. That's different than what you posted.
No, it is not about a Roth 401(k) rollover. Here is the thread, see Kiplinger link

Roth Rollover from After tax 401(k)
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Old 02-01-2010, 09:04 PM   #15
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If you are married and both over 50 you can put away 56K a year in a 401K plan. Plus if both spouses have employer matching that can add quite a bit more. Plus as you mentioned some plans allow after tax contributions. Then there are non IRAs for 12K a year if you are both over 50.

It is even better if you are over 50, married and have your own business 401K plan where you can add a portion of the business profits to the mix.
$56K is not right for a 401(k). It appears you added in the catch-up twice. It is $22K each or $44K total.
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Old 02-01-2010, 09:51 PM   #16
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$56K is not right for a 401(k). It appears you added in the catch-up twice. It is $22K each or $44K total.
My mistake. You are correct.
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Old 02-02-2010, 06:03 AM   #17
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Although the premiums are paid with after tax dollars, a whole life insurance policy (if paid up in not less than 7 years) allows you to defer tax on the earnings. Crediting rate, mortality charges and commissions will determine if this is worthwhile.
My Army Airforce Mutual Aid Association whole life policies are earning more than 5.8% net of all costs, as of last years annual statement. My Knights of Columbus Whole life policy yield is a bit less. No commissions with AAFMAA, not so with the KofC policy. I am more than half way through a 7 year pay plan with the AAFMAA policies, they are considered Modified Endowment Contracts (MECs).
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Old 02-02-2010, 03:34 PM   #18
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Tax efficient funds or ETF's in a taxable account are a decent choice. Do the math before grabbing just anything that is tax deferred. It's even nice to have some funds that have already been taxed, which might be available to keep you below the next tax bracket.
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Old 02-02-2010, 06:51 PM   #19
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My Army Airforce Mutual Aid Association whole life policies are earning more than 5.8% net of all costs, as of last years annual statement. My Knights of Columbus Whole life policy yield is a bit less. No commissions with AAFMAA, not so with the KofC policy. I am more than half way through a 7 year pay plan with the AAFMAA policies, they are considered Modified Endowment Contracts (MECs).
My Navy Mutual Aid Association policies are running at 6.3% net of all costs (and, of course, they also provide substantial insurance in return for those costs). I specifically turned to this after exhausting all other means of tax deferral. This was the only bright spot last year when the market was crashing.
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Old 02-02-2010, 10:38 PM   #20
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I'm not sure how long it will last, but in some cases you can now roll those after tax 401(k) contributions over to a Roth. I mentioned this in another thread.
Yes, and this can be a near free lunch, especially if in-service distributions of after-tax contributions are allowed by your employer. For some 401k plans, a person can make $32.5K/yr in after-tax contributions and then "immediately" roll these funds over into a Roth IRA. The only potential drawback is that any taxable earnings on the after-tax contributions must be included in the rollover. Most likely, these earnings will be small if the rollover occurs shortly after the contributions. Unlike TIRA to Roth rollovers, there need be no pro-rating of pre-tax contributions. The pre-tax contributions can remain in the 401k plan. It is in this way that funds that would have otherwise gone into taxable investment accounts can be placed into a Roth.
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