$31,000 Check coming soon and in the AMT tax bracket

[Foodeefish]

I will be receiving a check for $31,000 in two weeks and need to invest this money. We have a balanced portfolio of Mutual Funds and we gross too much to invest in an IRA or Roth.

We will retire fully in 15 years and we need to try and put this money where the taxman won't take most of it.

Are Munis the way to go?

Thanks



Moderator edit to clear the blank space.

 

[Nords]

I will be receiving a check for $31,000 in two weeks and need to invest this money. We have a balanced portfolio of Mutual Funds and we gross too much to invest in an IRA or Roth.

I haven't memorized IRS Pub 590 yet but I believe that anyone can contribute to a conventional IRA. It just can't always be deducted, even though it can later be converted to a Roth IRA.

Have you maxed out your 401(k) contributions? Are you allowed to make after-tax contributions?

What about I bonds?

 

[Martha]

I am not so enamoured of tax free compounding to contribute to a non-deductible IRA. My inclination would be some dividend payer stocks or a tax efficient fund.

 

[cube_rat]

I don't have any answer to your question, but I just wanted to comment that I feel your pain with AMT. We received a large windfall in 2005 and paid buttload A LOT of money in income taxes along with hitting AMT. Wow.

 

[LOL!]

Are you trying to avoid taxes on the $31,000 or are you trying to avoid taxes on any investment returns from the $31,000?

If the former, you need to give the money away or examine the effect of the that in TurboTax. In December I used my new copy of TurboTax to cleverly decide on which items to pay by December 31st to avoid AMT. We make over $200K a year and have never paid AMT. It's a combination of when you pay property taxes (not ALL at once), when you make charitable contributions, when you pay your mortgage interest, etc.

If the latter, then munis are probably not the answer either. Put taxable bonds in your tax-deferred accounts. Use ETFs or tax-managed funds in your taxable accounts. If you can't reach your desired fixed income allocation all into tax-deferred accounts, then I guess you may consider munis.

 

[clifp]

I agree with Martha. I don't see a lot of advantage to contributing to a non-deductable traditional IRA, and then having to pay tax at an unknown tax rate on any earnings.
An index fund is very tax efficient, or alternativley pick some some individual stocks that you think you can hold for a long-term. (Forever is Warren Buffett's prefered holding period, and who I am to argue with the guy). IRA money is hard to access and without a compelling tax advantage I don't recommend having all of your savings in a tax defered account.

 

[brewer12345]

This is a classic situation where you would want to buy and hold a low-turnover index mutual fund or ETF (or individual stocks, if you swing taht way). If you don't sell, you realize extremely little taxable income of any kind, so taxes of all sorts are academic.

 

[d]

some years ago i concluded (correctly or not) that having mixed deferred and non-deferred IRAs would create a small future accounting nightmare ... don't know what the current thinking on this might be.

 

[Leonidas]

Didn't you just ask this question?

http://early-retirement.org/forums/index.php?topic=11772.msg215348#msg215348

I'll just state the same answer.

It appears that you’re going to work for 5 (or maybe 10?) more years at your present combined salaries of $250K, and then retire to another state with no debt and estimated annual living expenses of $60K. You’ll also have more than half a million in retirement accounts and about $400K in gains from the sale of your current house after you’ve paid for the new house. Plus, until you make the move in 5-10 years, you will be LBYMs and investing an additional $100K each year.

But, you won’t be really retired, because you’re both going to find jobs in order to get health benefits, and you think/estimate/hope to make $60K a year in those new jobs.

...if I figured out your plan correctly, it sounds like you guys are not planning on withdrawing from your investments for another 13-20 years.

In which case I don’t see a reason to be making a big move into bonds at the moment. Certainly, I would not be putting the amount you’ve referenced in previous posts ($100K+/year for five-ten years) into bonds. Depending on your exact salaries after your move, you’ll be either in the 15 or the 25% tax bracket, and, the exemption amount for the AMT ought to exclude that nasty tax from applying to you. I don’t see tax exempt bonds being very attractive in that situation.

I agree with LOL’s post. Figure out your desired asset allocations and use your tax-deferred accounts to hold bonds. Delay taxable income, that you won’t need for quite some time anyway, by investing in something with capital gains potential and then sell as needed once you’re in the lower tax bracket.

If your situation were different (e.g. you need the income for current expenses) then municipal bonds might be an option that makes sense. But you clearly state you have much more money coming in each month than you need/want to spend. Pick an option that won't pay you interest or capital gains now. You have years before you need this money, go for capital gains that you can take in the future when you're in a much lower tax bracket and clear of the AMT.