Hi All...Any good tax strategies out there

[Barnstormer]

Been a big fan of this community for about 4 years. ER'd for a year back in 2003 at 38 (retired military). It was short lived as I decided to head back into the world of the employed. No regrets, altho I do miss the independence. Strapped myself to a 235K mortgage so can't get out now.

My question for the community is are there any good, simple tax strategies, (or books/websites I should try) beside maxing out a 401K that could have a significant impact on my overall tax bill. I'm in the 28% bracket and would rather more of that money be used to get me back to FIRE'd.

Any help would be appreciated and thanks to all who make this board an awesome source of information.

JLS

[uncledrz]

JLS
I'm going to assume that you do not have your own business nor real estate for investment. Given that, consider Roth IRA as an excellent way to save on taxes on your investments, but not as a deferral on ordinary income.

The fairmark site, fairmark.com, has quite a bit of tax information.

Uncledrz

[Nords]

Welcome to the board, Barnstormer!

Quote:

Originally Posted by Barnstormer My question for the community is are there any good, simple tax strategies, (or books/websites I should try) beside maxing out a 401K that could have a significant impact on my overall tax bill.* I'm in the 28% bracket and would rather more of that money be used to get me back to FIRE'd.

Well, if you're not already in a low-tax state you could consider moving to one that doesn't tax a military pension.* Same for counties/cities and other locality taxes.

Max out your 401(k) and your IRAs for tax-deferred compounding and end up in a lower tax bracket when you retire.* Ed Slott's IRA books offer more detailed advice.

Does your employer offer a Roth 401(k)?*

Rental real estate would give you plenty of opportunities for deferring taxes through 1031 exchanges.* However profits on monthly rents are taxed at your income bracket.

Quote:

Originally Posted by Barnstormer Been a big fan of this community for about 4 years.* ER'd for a year back in 2003 at 38 (retired military).* It was short lived as I decided to head back into the world of the employed.* No regrets, altho I do miss the independence.* Strapped myself to a 235K mortgage so can't get out now.

As a military retiree who's been ER'd for four years now, I'm curious-- what made you decide to go back to work?* Did the mortgage send you back to work first or was it other factors followed by the mortgage?

[Barnstormer]

Thanks for the input guys.

Going back to work was more a timing decision. I'm in aviation and my skills would not be marketable after a long layoff. So after a year I decided I would see if working at a second career would be for me.

I do live in a state that doesn't tax the pension, however my AGI in now too high to contribute to an IRA and altho I max out the 401K with a 5% match, I still would like to to save some the the 23K in Fed tax. I get tax sticker shock when I add up the FICA, SSA, STATE and MEDICARE.

I know I'm more fortunate than most and maybe should just be happy I have such a high tax bill.

[Nords]

Quote:

Originally Posted by Barnstormer I do live in a state that doesn't tax the pension, however my AGI in now too high to contribute to an IRA

Keep in mind that although your current income may be too high to deduct contributions to a conventional IRA, or even too high to contribute to a Roth IRA, you can always make a non-deductible contribution to a conventional IRA.

The advantage comes when your income drops back down to the 10-15% bracket (usually at retirement but before mandatory IRA withdrawals) and you can convert the conventional IRA to a Roth. You've enjoyed years of tax-deferred compounding on taxed contributions, you've already paid taxes on the basis so it's not taxed at conversion (only the gains are taxes), and after the conversion you can enjoy tax-free compounding and no mandatory withdrawals for the rest of your life.

Quote:

Originally Posted by Barnstormer I know I'm more fortunate than most and maybe should just be happy I have such a high tax bill.

Considering the alternatives, paying taxes is good.

[Barnstormer]

Oh, and the mortgage was a result of moving to a higher cost of living area. While I was ER'd I owned home free and clear. Now I will work at least till new mortgage is paid off. About 4 more years. Unless of course we decide to up and move again!

[Barnstormer]

Nords, I may be wrong here, but isn't there a max income where you can't even add money to an IRA? I thought it was something like 165K for a married couple.

[Nords]

Quote:

Originally Posted by Barnstormer Nords, I may be wrong here, but isn't there a max income where you can't even add money to an IRA?* I thought it was something like 165K for a married couple.

Not that I'm aware of, but I'm not a tax expert like Martha or some of the other posters.

Conventional IRAs don't have an income limit, although Roth IRAs do have an income limit. There's also an income limit on a Roth conversion although that limit is about to be waived starting, I believe, in 2008.

Take a look at pp 10-11 & 54-55 of IRS Pub 590.

[Barnstormer]

Well this is very informational. Maybe I'm not taking advantage of the IRA as I should. Couple of questions for you nords.

1) Can I and my DW have both a traditional and a Roth IRA? $4000/year in each for a annual total of 16K?

2) Is my military pension figured in the AGI figure that limits contributions to the Roth IRA?

[Martha]

You have to add together your Roth and traditional IRA contributions and the total for both together can't exceed the yearly maximum ($4000 for each spouse if less than 50).

I don't know if a miliary pension is considered being covered by a retirement plan at work.* You might look close at publication 590 to see if it defines "retirement plan."

[Martha]

Oh, remember that if only one spouse if covered by a retirement plan at work, the other spouse may be able to deduct IRA contributions as the income phase out is higher for a spousal IRA (150,000 to 160,000 AGI vs. 75,000 to 85,000 AGI if both are covered by retirement plans.)

[FinanceDude]

Quote:

Originally Posted by Martha You have to add together your Roth and traditional IRA contributions and the total for both together can't exceed the yearly maximum ($4000 for each* spouse if less than 50). I don't know if a miliary pension is considered being covered by a retirement plan at work.* You might look close at publication 590 to see if it defines "retirement plan."

i don't think it falls under covered, if in fact he is receiving payments, not deferring money to it. *A quick call to the IRS should settle the issue..........I found them (incredibly) very helpful when I call.................

[Nords]

Quote:

Originally Posted by Barnstormer Well this is very informational.* Maybe I'm not taking advantage of the IRA as I should.* Couple of questions for you nords.

I know a lot about my own taxes but I'm not a tax expert and I have huge jagged gaping knowledge holes in the area of other people's taxes.

Keep in mind that my advice is what you paid for it. *In fact, considering penalties & interest, it might be worth a lot less.

Quote:

Originally Posted by Barnstormer 1) *Can I and my DW have both a traditional and a Roth IRA? *$4000/year in each for a annual total of 16K?

You can each have both a traditional and a Roth IRA (so my spouse and I have a total of four separate IRA accounts) but the combined total annual contributions to them can't exceed the max. *

So, if your contribution limit for your age/income is $4000, then your total contributions to your conventional & Roth IRAs can't exceed $4000. *Your spouse has to play by the same rulebook, and if it's $4000 for her too then your combined total contributions to all four accounts wouldn't be allowed to exceed $8000. *One exception (of many) is that your AGI might limit the amount of the contribution you can make to the Roth IRAs, although it won't affect the amount of the contribution you can make to the conventional IRAs.

I used the $4000 limit as an example. *It's actually the lower of $4000 or your annual earned income, and if you're 50 or older that year then it's raised to the lower of $5000 or your annual earned income. *The detailed answer is a lot longer & more complicated and you should really read the verbiage in Pub 590 and/or consult a tax expert.

Quote:

Originally Posted by Barnstormer 2) *Is my military pension figured in the AGI figure that limits contributions to the Roth IRA?

Looking at my 1040 return I'd have to say "Yes." *Income runs from line 7 to line 12, cap gains(losses) and IRA distributions/conversions take up a few more lines, and my military pension 1099-R is recorded on line 16b. *All those lines add up to "total income" and there's no way to subtract any of the pension from the section that results in AGI.

[Martha]

See page 12 of publication 590 for how to figure out if you are covered by a retirement plan at work.

This issue has more to due with whether the contribution can be deducted, not whether it can be made.

At re-reading this thread, I see I mis-interpreted the question about the pension. The question was whether it is counted as part of the AGI when figuring ROTH income limits. Yes it is. So are capital gains, interest, and dividends. It is not just income from work.

[Martha]

Quote:

Originally Posted by FinanceDude i don't think it falls under covered, if in fact he is receiving payments, not deferring money to it. *A quick call to the IRS should settle the issue..........I found them (incredibly) very helpful when I call.................

If that is the case, you are correct.* You need to look at your W2 to see if you are covered under a retirement plan at work.

Oh, I rarely believe what the IRS tells me on the phone. Their error rate is quite high and they can't be bound by what they say unless they issue a letter ruling.

[Martha]

Quote:

Originally Posted by Nords I used the $4000 limit as an example. *It's actually the lower of $4000 or your annual earned income, and if you're 50 or older that year then it's raised to the lower of $5000 or your annual earned income. *The detailed answer is a lot longer & more complicated and you should really read the verbiage in Pub 590 and/or consult a tax expert.

Yes, for example, only one spouse needs to be working. The non-working spouse can contribute to an IRA.

[retire@40]

Quote:

Originally Posted by FinanceDude ...A quick call to the IRS should settle the issue..........I found them (incredibly) very helpful when I call.................

It's one thing to be helpful.* It's another thing to be correct.* Unless the question is very simple, I wouldn't trust an IRS phone answer any more than I would trust an answer on this forum.

[Barnstormer]

I appreciate all the discussion and I believe I have my answer. Based on the fact that the pension is included in AGI, DW and I are limited to a Traditional IRA. Time to fill out some paperwork. Used to have a Traditional IRA before I converted them to a Roth back in 98. Hated tracking the basis with the 8606 a tax time. Seemed like it was going to be a hassle when I finally started drawing from it. Guess it's worth the tax-free growth.

Thanks again.

[Nords]

Quote:

Originally Posted by Barnstormer Used to have a Traditional IRA before I converted them to a Roth back in 98.* Hated tracking the basis with the 8606 a tax time.* Seemed like it was going to be a hassle when I finally started drawing* from it.* Guess it's worth the tax-free growth.

That was a smart move in 1998.

If you think that Form 8606 was a hassle for tracking non-deductible IRA contributions then you're gonna love filling out the other parts for the incremental annual conversions. The good news is that TurboTax handles the paperwork better than the IRS does.

[Barnstormer]

Quote:

Originally Posted by Nords If you think that Form 8606 was a hassle for tracking non-deductible IRA contributions then you're gonna love filling out the other parts for the incremental annual conversions. The good news is that TurboTax handles the paperwork better than the IRS does.

I remember back when I had the full deduction on my IRA and then over the years it slowly slipped away. The 8606 was a nusciance(sp) until I converted to the Roth and just paid the tax over four years...that hurt but they told me it was better in the long run. I cashed out of the Roth to pay off the house back in 03. Debated a very long time but it was the right decision. There was no penalty since it was all contributions after the 01/02 crash. The piece of mind I gained was worth the potential lost opportunity for growth. Of course the house is now sold and got a very nice gain which was tax free. So it all worked out. Now I'm starting the IRAs over from scatch at 42.

With the advent of TaxCut/Turbo Tax it did become a no-brainer which was very nice. I just switched to Turbo Tax last year after 6 years with TC and must say I liked TC better. Probably just what I was used to. Switched to a Mac and TaxCut was not available for the Mac.