Tax Issue

[Mulligan]

I have just started a part time job that will toss me above the state AGI limit that will cost me $2000 in state income taxes (its a pension income exemption). This past year I put enough in a 529 plan to avoid the AGI limit, but that will not work this year. The employer has 403b and 457b plans available that I can use to get under the number. Here is my question. The part time income is $30k. Would you put just enough (will be about $10k this year) to capture the credit, or just defer all the $25k (I want to show $5k income so I can contribute to my yearly Roth IRA)? My tax bracket is comfortably in the 24% tax bracket with a pension, so deferring will not reduce tax load down the road when it had to be withdrawn. I guess I am asking would you go ahead and take the tax hit now, or defer it even though there will be no tax advantage in the future? I have no current,intermediate, or even any long term need yet for any of this money and I just plan on adding it to my stash. I am aware that at age 48, I would not be able to touch it until after age 59.5 which is fine by me.
I do not have any pretax investment money, and the last thing I want is another opened up piddly $ account, but I assume I could eventually roll all of this money into my Vanguard account as an IRA? Any thoughts would be appreciated, and yes I am obsessed with making sure I get that $2000 tax refund!

[pb4uski]

If the taxes that will be paid on this incremental income is the same now as later, I think I would lean toward deferring just enough to capture the credit ($10k) and taking the remaining $20k as income today, paying the tax and investing the after-tax earnings in a taxable account and a Roth (up to the $5k limit) so that your overall investment nestegg is better diversified in terms of taxable/tax-deferred/tax-free.

Sounds like your in a position where you are flush enough that it doesn't really matter much - but who know what the future will bring.

[Mulligan]

Quote:

Originally Posted by pb4uski If the taxes that will be paid on this incremental income is the same now as later, I think I would lean toward deferring just enough to capture the credit ($10k) and taking the remaining $20k as income today, paying the tax and investing the after-tax earnings in a taxable account and a Roth (up to the $5k limit) so that your overall investment nestegg is better diversified in terms of taxable/tax-deferred/tax-free. Sounds like your in a position where you are flush enough that it doesn't really matter much - but who know what the future will bring.

Maybe I should have mentioned I am not flush so that is why the 2k is important. I was fortunate to make a late push into administration and got my pension based on those salaries, but I only had a couple good years so I did not have an opportunity to build assets outside my pension which included a decision to spend almost $100k to buy 4 years and retire early. So now I am trying to build up money in case pension problems occur down the road (who knows in 15 years). That is why I am taking this job as I can use it to build up a better asset base. Putting it all in as tax deferred puffs up the reserves faster, but the approx. $18k I would get after taxes would have the tax issue behind it.

[samclem]

Quote:

Originally Posted by Mulligan I guess I am asking would you go ahead and take the tax hit now, or defer it even though there will be no tax advantage in the future?

Here are the major factors I see:
1) Do you think your tax rate will be higher or lower in the future? It sounds like that will depend on overall US tax rates in the US. Have you heard of lots of plans to cut taxes for people with your income level? Probably not.
2) Putting $$ into your 401K will increase your RMDs in later years. If you keep the money in a regular taxable account, it won't be subject to RMDs. It might not make much of a difference, but if you crunch the future numbers and it looks like the RMDs could drive you into yet higher tax rates, you might be better off with more flexibility.

There's probably not a huge difference, but definitely get the $$ from the state.