Tax Deferred Savings

[cmy1176]

Here's my situation:

Married with total income of approximately 210K (My wife and I each make about 105K)
I have a 401k that I max out
My wife has no company sponsored 401k. She's not self-employed so doesn't qualify for a SEP, SOLO, ETC.
We make two much money for a ROTH and too much to deduct for a regular IRA.

Anyone have suggestions on how to save for retirement and try to maximize tax deferrment, other than simply saving to taxable accounts? I've looked into starting an IRA (without the pre-tax deduction) and rolling it into a ROTH in 2010 with the pending rule changes. But their seems to be some issues with that, unless I want to pay the conversion penalty on earnings.

Thanks for any suggestions.....

[brewer12345]

I don't think the various forms of variable annuity are attractive enough to bother, given the crrent tax structure. If you have a large portfolio, it might be worth stuffing your bond exposure and maybe REITs into a low cost VA offered by Vanguard, etc., but even then its a bit of a stretch. Personally, I think you;d just be better off with ETFs and tax-managed mutual funds in an after-tax account.

[FinanceDude]

Originally Posted by brewer12345

I don't think the various forms of variable annuity are attractive enough to bother, given the crrent tax structure. If you have a large portfolio, it might be worth stuffing your bond exposure and maybe REITs into a low cost VA offered by Vanguard, etc., but even then its a bit of a stretch. Personally, I think you;d just be better off with ETFs and tax-managed mutual funds in an after-tax account.

When you factor in ordinary income tax rates for withdrawals on the annuity, the tax-deferral opportunity is mitigated quite a bit. If you use muni bonds or tax-managed MFs for the fixed income portion, and low turnover and/or tax-managed funds for the rest, you should be at a net same amount, or close enough...........besides, you're not tying your money up to 59 1/2 in an after-tax account.................

[brewer12345]

Originally Posted by FinanceDude

When you factor in ordinary income tax rates for withdrawals on the annuity, the tax-deferral opportunity is mitigated quite a bit. If you use muni bonds or tax-managed MFs for the fixed income portion, and low turnover and/or tax-managed funds for the rest, you should be at a net same amount, or close enough...........besides, you're not tying your money up to 59 1/2 in an after-tax account.................

I think the depends on your assumptions about tax rates, taxable income, etc. If I am in a 30+% bracket now, but expect to be in the 15% bracket when I am pulling money out of the VA, it wight be a good deal. But you'd have to have a lot more confidence than I do that the tax code won't change by then.

[FinanceDude]

Originally Posted by brewer12345

I think the depends on your assumptions about tax rates, taxable income, etc. If I am in a 30+% bracket now, but expect to be in the 15% bracket when I am pulling money out of the VA, it wight be a good deal. But you'd have to have a lot more confidence than I do that the tax code won't change by then.

I think there's NO DOUBT taxes will be higher in the future, the million dollar question is HOW MUCH!!!

I read somewhere that we could fund SS indefinitely and take Medicare out for 70 more years if we lifted the caps on income for those taxes............and made everyone pay the same percentage no matter what they made.............

[Nords]

Originally Posted by cmy1176

Anyone have suggestions on how to save for retirement and try to maximize tax deferrment, other than simply saving to taxable accounts?

I'm not a financial advisor and I'm never going to have a CPA, but we made over 15 years of non-deductible contributions to our traditional IRAs. That's one way to maximize your tax deferment, although you'll start paying regular income tax on RMDs instead of cap gains on a taxable equity.

Now that we're ER'd (and well below the AGI limits) we're converting a bit of our IRAs to Roths every year (to stay within the 15% tax bracket). We expect spouse's pension (in another 16 years) will kick us into the 25% bracket so we expect to be finished before then.

The decision to convert to a Roth has many more complications, but luckily you can search for the many conversion threads here.

Originally Posted by cmy1176

I've looked into starting an IRA (without the pre-tax deduction) and rolling it into a ROTH in 2010 with the pending rule changes. But their seems to be some issues with that, unless I want to pay the conversion penalty on earnings.

I know that the conversion AGI limit is lifted in 2010 but I'm not sure what issues or conversion penalties you're referring to.

[MooreBonds]

Originally Posted by FinanceDude

I think there's NO DOUBT taxes will be higher in the future, the million dollar question is HOW MUCH!!!

I read somewhere that we could fund SS indefinitely and take Medicare out for 70 more years if we lifted the caps on income for those taxes............and made everyone pay the same percentage no matter what they made.............

Only problem is that we already are taxed on Medicare for every $ we earn. There is no cap.

SS, on the other hand, is another matter...don't quite know if I would be for full SS taxes on everything over the cap. At the very least, start out with perhaps 10% or 25% of the SS tax (employee and employer) on all of the income...then VERY gradually notch it up over the years.

[jasond]

SS, on the other hand, is another matter...don't quite know if I would be for full SS taxes on everything over the cap. At the very least, start out with perhaps 10% or 25% of the SS tax (employee and employer) on all of the income...then VERY gradually notch it up over the years.
[/quote]

I don't understand why we have to gradually notch it up. What are we going to get if we don't millionair CEO's crying about how much SS they have to pay?

Jason

[milmoose]

Variable Universal Life policies are relatively high fee and should not be considered by people that can direct additional savings to an IRA or 401K, but a VUL policy might be an option here.

1. Make the IRA contributions regardless of deductability.
2. Ask your employers if they offer deferred compensation plans.
3. Look into VUL. It's high-fee, but provides tax-free growth of investment principle.

- M

[LOL!]

Originally Posted by cmy1176

My wife has no company sponsored 401k. She's not self-employed so doesn't qualify for a SEP, SOLO, ETC.
...
Anyone have suggestions on how to save for retirement and try to maximize tax deferrment, other than simply saving to taxable accounts?

Investing in taxable accounts in a tax-managed way is a great way to save for retirement. We've been doing this for years so for retirement we have more in taxable accounts than in tax-deferred accounts.

Another option is to get spouse's employer to start a 401(k) of some kind. There are plenty of advisor's salivating to get their hands on the fees generated, so it should be easy to do.

And unless you are going to convert a non-deductible traditional IRA to a Roth IRA, why would you even consider it? After all, investing in taxable account in a tax-managed way will give you lower taxes, more options, no penalties and more flexibility.

[brewer12345]

Originally Posted by milmoose

Variable Universal Life policies are relatively high fee and should not be considered by people that can direct additional savings to an IRA or 401K, but a VUL policy might be an option here.

1. Make the IRA contributions regardless of deductability.
2. Ask your employers if they offer deferred compensation plans.
3. Look into VUL. It's high-fee, but provides tax-free growth of investment principle.

- M

How can you possibly suggest a VUL? Unless you really need long term life insurance, there is no way the many layers of expenses could ever beat the after tax performance of LTBH index funds/ETFs.

[milmoose]

I agree that VUL isn't a great investment option for MOST people. But, once you've exhausted other tax-shelters, it is a consideration.

Unless you really need long term life insurance, there is no way the many layers of expenses could ever beat the after tax performance of LTBH index funds/ETFs.

I'm not sure I agree with that statement, especially for persons in a high tax bracket.

I'm not saying VUL is a great option, just that it might be better than throwing money into a taxable account (even if the investor is dilligent about managing the tax liabilities).

- M

[brewer12345]

Help me out here: how is paying a 15% LT cap gains tax many years down the road worse than having your pocket picked every year in a VUL policy?

[FinanceDude]

Originally Posted by milmoose

I agree that VUL isn't a great investment option for MOST people. But, once you've exhausted other tax-shelters, it is a consideration.

Unless you really need long term life insurance, there is no way the many layers of expenses could ever beat the after tax performance of LTBH index funds/ETFs.

I'm not sure I agree with that statement, especially for persons in a high tax bracket.

I'm not saying VUL is a great option, just that it might be better than throwing money into a taxable account (even if the investor is dilligent about managing the tax liabilities).

- M

I too am confused on your premise............please expound.............

[milmoose]

I'll admit defeat here! IF an investor holds an index fund or ETF that is managed in a tax-efficient manner for the long-term (so only capital gains rates apply), that is probably better than a VUL policy....

The reality is that most investors over-churn their portfolios, causing tax liabilities, but holding for the long-term in a taxable account is probably better than pricy VUL (unless your employer pays for the insurance component).

- M

[cmy1176]

Originally Posted by Nords

I know that the conversion AGI limit is lifted in 2010 but I'm not sure what issues or conversion penalties you're referring to.

I previously converted an old 401k into an IRA. That's made up of pre-tax deductions and investment gains. I haven't done the numbers yet, but let's say it's 60K of deductible contributions and 40K of gains.

If I now open an IRA with after tax dollars and no deductions and fund that until 2010, I'd have 20K plus whatever gains it's made. For the sake of this analysis let's say it makes 5K. My original assumption was that if I converted that 25K to a ROTH I would only have to pay income taxes on the 5K and it would grow tax deferred until retirement. (I'm 29, so I have a long way to go to 591/2)

Tax bill = 5K*33% = $1650

But, what I've been told, is that I'd have to actually pay the ratio of my tax deferred for all accounts even if I am only converting one. So, my tax bill would be

105K/125K= 84%
84%*25K = $21,000
$21,000*33% = $6,930

I hope you can follow this, and please correct me if you think I am incorrect. I really need to talk to a CPA to confirm.

Thanks for people's suggestions. I think for me ETF's may be the best choice to control taxes, but still have growth.

[Nords]

Originally Posted by cmy1176

Tax bill = 5K*33% = $1650

I know that this is just an example, but if you're in the 33% bracket now then I wouldn't bother with the conversion unless you KNOW you'll be in an even higher bracket at RMD. So I'm not sure there's any constructive financial analysis here.

Now if your example was among the 10% 15%, & 25% brackets you might be able to make a conversion more compelling.

Originally Posted by cmy1176

But, what I've been told, is that I'd have to actually pay the ratio of my tax deferred for all accounts even if I am only converting one. So, my tax bill would be

That's the way Form 8606 works. Instead of trying to work it out logically I'd recommend chugging through the form... because that's what the IRS does.

I'm not sure that you're using the word "penalty" in the same way the IRS uses it.

Originally Posted by cmy1176

I hope you can follow this, and please correct me if you think I am incorrect. I really need to talk to a CPA to confirm.

You sure do!

[riskadverse]

Originally Posted by cmy1176

Anyone have suggestions on how to save for retirement and try to maximize tax deferrment, other than simply saving to taxable accounts?

Purchase individual stocks or ETF's -- tax defered until you sell them. Purchase I-Bonds -- tax defered until you cash them in.