ziggy29
Moderator Emeritus
I'm trying to think through this completely and I'm hoping the braintrust here can poke some holes into my logic, or else find few holes and confirm the strategy I am pondering.
Right now our income (after taxes and retirement contributions) is close to our outgo. I have a part-time j*b at a local post office where I normally get around $25K a year (and perhaps more importantly, really good health insurance for almost nothing) and my wife is a pastor at a small church with a fairly modest income. We are both contributing to our retirements; I contribute 5% to my TSP (to get the full match) and she contributes 6% to her 403B, for about $2,500 a year. (Her employer contributes 10% of compensation to her 403B regardless of her contribution.)
DW's income is considered self-employment income for FICA purposes, so she pays income taxes AND self-employment taxes on her income. Solidly in the 15% marginal bracket, after considering the deduction of half her self-employment tax her income is taxed at approximately 29% on the margins because of the self-employment tax. Our other taxable income is taxed 15% on the margins. It would be nice if we could replace some of the self-employment income with other income so more of it is effectively taxed at the lower rate.
So here is what I am thinking. What if I started a 72(t) distribution from one of my IRAs (would generate about $16K per year), and used just about all of that to crank up DW's 403B contributions to the max? We would be taking income taxed at 15% in order to reduce a similar amount of income being taxed at about 29%. Basically, it's a self-employment tax avoidance mechanism which would be perfectly legal.
I know of two gotchas: first, I'm locked into this until 2025, the year I turn 59.5. (That is not a big deal as long as we have enough earned income to put it all back into a pretax retirement plan. And if we didn't, we'd probably need the money anyway.) Secondly, it will modestly reduce her SS benefits at retirement, though all the spreadsheet math I've done suggests our tax savings will considerably exceed the reduction in her benefits unless she lives to be something like 105.
Any more gotchas I haven't considered? I'm not really close to pulling the trigger, but it seems like a seductive idea at first glance, and so far I haven't encountered any negatives that outweigh the positives. If there's a serious problem I haven't considered, I'd love to hear it so I can kill the idea before it gets really serious.
I suppose we could partially or completely forego the 72(t) stuff and just go year by year eating a little of our savings each year, but negative cash flow and steadily declining savings balances make me nervous.
Right now our income (after taxes and retirement contributions) is close to our outgo. I have a part-time j*b at a local post office where I normally get around $25K a year (and perhaps more importantly, really good health insurance for almost nothing) and my wife is a pastor at a small church with a fairly modest income. We are both contributing to our retirements; I contribute 5% to my TSP (to get the full match) and she contributes 6% to her 403B, for about $2,500 a year. (Her employer contributes 10% of compensation to her 403B regardless of her contribution.)
DW's income is considered self-employment income for FICA purposes, so she pays income taxes AND self-employment taxes on her income. Solidly in the 15% marginal bracket, after considering the deduction of half her self-employment tax her income is taxed at approximately 29% on the margins because of the self-employment tax. Our other taxable income is taxed 15% on the margins. It would be nice if we could replace some of the self-employment income with other income so more of it is effectively taxed at the lower rate.
So here is what I am thinking. What if I started a 72(t) distribution from one of my IRAs (would generate about $16K per year), and used just about all of that to crank up DW's 403B contributions to the max? We would be taking income taxed at 15% in order to reduce a similar amount of income being taxed at about 29%. Basically, it's a self-employment tax avoidance mechanism which would be perfectly legal.
I know of two gotchas: first, I'm locked into this until 2025, the year I turn 59.5. (That is not a big deal as long as we have enough earned income to put it all back into a pretax retirement plan. And if we didn't, we'd probably need the money anyway.) Secondly, it will modestly reduce her SS benefits at retirement, though all the spreadsheet math I've done suggests our tax savings will considerably exceed the reduction in her benefits unless she lives to be something like 105.
Any more gotchas I haven't considered? I'm not really close to pulling the trigger, but it seems like a seductive idea at first glance, and so far I haven't encountered any negatives that outweigh the positives. If there's a serious problem I haven't considered, I'd love to hear it so I can kill the idea before it gets really serious.
I suppose we could partially or completely forego the 72(t) stuff and just go year by year eating a little of our savings each year, but negative cash flow and steadily declining savings balances make me nervous.
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