how to tax defer more $$

[smjsl]

Newbie question here inspired by posters who assume millions in the 401(k)/Roth accounts: for those of us that don't have our own business, what options do we have to get more money into tax-advantaged accounts beyond:

(1) ~16.5k/year limit in 401(k)
(2) ~5k/year IRA
(3) catch up contribution to above if you are older than certain age
(4) I heard some companies offer non-qualified contributions to 401(k) after the initial 16.5k limit, but apparently many companies don't.

At ~20k/year rate, it seems like a long time to accumulate a million or two in the account, unless your rate of return is high.

What are some other ways? Am I missing some obvious ones?

Thanks!

 

[travelover]

If you have a health savings account (HSA) you can stash cash there. Also if you have a spouse, you can defer money in their name. Annuities are another possibility, but I won't mention them.

 

[LOL!]

We don't have millions in our tax-deferred accounts. Note the use of the word "We".

If you want to double your eligible deferral, then get married to someone who works. And try to find a company that has a substantial matching policy.

Other than that, you can perhaps try one of those variable annuity things. I read that Vanguard sells them.

But you can invest tax-efficiently in an after-tax brokerage account. There are no contribution limits. You can take the money out anytime you want. If you die, your heirs get the stepped up basis. Dividends are taxed at special low rates -- as low as 0%.

 

[FIREd]

Annuities... if you dare. I-bonds also.

 

[kyounge1956]

Annuities... if you dare. I-bonds also.

Aren't Series EE Savings Bonds also tax deferred (IOW you don't pay tax until you cash them)?

 

[teejayevans]

Aren't Series EE Savings Bonds also tax deferred (IOW you don't pay tax until you cash them)?

I think you have a choice, pay now or pay later.
TJ

 

[Gumby]

Although the premiums are paid with after tax dollars, a whole life insurance policy (if paid up in not less than 7 years) allows you to defer tax on the earnings. Crediting rate, mortality charges and commissions will determine if this is worthwhile.

 

[MasterBlaster]

Newbie question here inspired by posters who assume millions in the 401(k)/Roth accounts: for those of us that don't have our own business, what options do we have to get more money into tax-advantaged accounts beyond:
(4) I heard some companies offer non-qualified contributions to 401(k) after the initial 16.5k limit, but apparently many companies don't.

For number 4) above the contributions are non-qualified but any earnings in this case would be qualified funds subject to normal income tax upon withdrawal.

Per the IRS, If your plan allows it you and your company's match together could put in up to a sum total of $49000.0 (for 2010) into the 401k.
However only the company match and the ($16.5k plus possible (over-50) catchup of $5.5k) are tax deferrable.

Something else to consider...

Some people don't want to put non deductable money in a 401k because when you take earnings out they will be taxed at the (higher) income tax rate as opposed to long term capital gains rates. Good luck predicting income tax rates, captital gains rates, and (possible) 401k-fair share tax rates some decades out though.

 

[FIREd]

I saw that USAA offers something called a "savings annuity". It sounds like a tax-deferred CD (up to 10 year deferral) though no FDIC insurance.

 

[travelover]

.......................
Something else to consider...

Some people don't want to put non deductable money in a 401k because when you take earnings out they will be taxed at the (higher) income tax rate as opposed to long term capital gains rates. Good luck predicting income tax rates, captital gains rates, and (possible) 401k-fair share tax rates some decades out though.

I'm not sure how long it will last, but in some cases you can now roll those after tax 401(k) contributions over to a Roth. I mentioned this in another thread.

 

[MasterBlaster]

I'm not sure how long it will last, but in some cases you can now roll those after tax 401(k) contributions over to a Roth. I mentioned this in another thread.

Do you have a reference to this, that would be very interesting.

You aren't by chance thinking of designated Roth 401k accounts (ie. Roth 401k) being rolled over to a Roth IRA. That's different than what you posted.

 

[TooFrugal]

At ~20k/year rate, it seems like a long time to accumulate a million or two in the account, unless your rate of return is high.

If you are married and both over 50 you can put away 56K a year in a 401K plan. Plus if both spouses have employer matching that can add quite a bit more. Plus as you mentioned some plans allow after tax contributions. Then there are non IRAs for 12K a year if you are both over 50.

It is even better if you are over 50, married and have your own business 401K plan where you can add a portion of the business profits to the mix.

 

[kyounge1956]

I think you have a choice, pay now or pay later.
TJ

I believe you are correct, the taxes can be either "pay as you go" or "pay when the bond is cashed". However the option of paying the tax later gives another opportunity for tax deferral in addition to I bonds. There is a limit on Savings Bond purchases, but it is a limit on the amount of each series, not on Savings Bonds of all series. If I understand this link correctly, one may buy $5000 worth of each series in paper, plus another $5000 of each series via Treasury Direct, or a total of $20K, per person, per year. I think Savings Bond purchases would be more or less equivalent to non-deductible IRA or non-qualified 401K contributions--the face value is paid for with after-tax money, and the earnings are taxed later as regular income.

 

[travelover]

Do you have a reference to this, that would be very interesting.

You aren't by chance thinking of designated Roth 401k accounts (ie. Roth 401k) being rolled over to a Roth IRA. That's different than what you posted.

No, it is not about a Roth 401(k) rollover. Here is the thread, see Kiplinger link

http://www.early-retirement.org/forums/f28/roth-rollover-from-after-tax-401-k-46778.html

 

[LOL!]

If you are married and both over 50 you can put away 56K a year in a 401K plan. Plus if both spouses have employer matching that can add quite a bit more. Plus as you mentioned some plans allow after tax contributions. Then there are non IRAs for 12K a year if you are both over 50.

It is even better if you are over 50, married and have your own business 401K plan where you can add a portion of the business profits to the mix.

$56K is not right for a 401(k). It appears you added in the catch-up twice. It is $22K each or $44K total.

 

[TooFrugal]

$56K is not right for a 401(k). It appears you added in the catch-up twice. It is $22K each or $44K total.

My mistake. You are correct.

 

[jimnjana]

Although the premiums are paid with after tax dollars, a whole life insurance policy (if paid up in not less than 7 years) allows you to defer tax on the earnings. Crediting rate, mortality charges and commissions will determine if this is worthwhile.

My Army Airforce Mutual Aid Association whole life policies are earning more than 5.8% net of all costs, as of last years annual statement. My Knights of Columbus Whole life policy yield is a bit less. No commissions with AAFMAA, not so with the KofC policy. I am more than half way through a 7 year pay plan with the AAFMAA policies, they are considered Modified Endowment Contracts (MECs).

 

[Animorph]

Tax efficient funds or ETF's in a taxable account are a decent choice. Do the math before grabbing just anything that is tax deferred. It's even nice to have some funds that have already been taxed, which might be available to keep you below the next tax bracket.

 

[Gumby]

My Army Airforce Mutual Aid Association whole life policies are earning more than 5.8% net of all costs, as of last years annual statement. My Knights of Columbus Whole life policy yield is a bit less. No commissions with AAFMAA, not so with the KofC policy. I am more than half way through a 7 year pay plan with the AAFMAA policies, they are considered Modified Endowment Contracts (MECs).

My Navy Mutual Aid Association policies are running at 6.3% net of all costs (and, of course, they also provide substantial insurance in return for those costs). I specifically turned to this after exhausting all other means of tax deferral. This was the only bright spot last year when the market was crashing.

 

[Shawn]

I'm not sure how long it will last, but in some cases you can now roll those after tax 401(k) contributions over to a Roth. I mentioned this in another thread.

Yes, and this can be a near free lunch, especially if in-service distributions of after-tax contributions are allowed by your employer. For some 401k plans, a person can make $32.5K/yr in after-tax contributions and then "immediately" roll these funds over into a Roth IRA. The only potential drawback is that any taxable earnings on the after-tax contributions must be included in the rollover. Most likely, these earnings will be small if the rollover occurs shortly after the contributions. Unlike TIRA to Roth rollovers, there need be no pro-rating of pre-tax contributions. The pre-tax contributions can remain in the 401k plan. It is in this way that funds that would have otherwise gone into taxable investment accounts can be placed into a Roth.

 

[TooFrugal]

and this can be a near free lunch, especially if in-service distributions of after-tax contributions are allowed by your employer. For some 401k plans, a person can make $32.5K/yr in after-tax contributions and then "immediately" roll these funds over into a Roth IRA.

I asked Fidelity about this and the rep I talked to said they were allowing clients to do this, but they didn't have a specific ruling from the IRS on it either way if this would be allowed. He said they had been asking the IRS for a specific ruling in this tactic for years and had never received a response. My accountant and pension consultant both said they no specific knowledge of whether this would be allowed or not, and didn't want to second guess the IRS.

I have gone over all of the IRS rules I could find on the topic and it seems like it would be okay, but if the IRS decides at a future date they won't allow it I don't know what the penalties might be.

 

[travelover]

I asked Fidelity about this and the rep I talked to said they were allowing clients to do this, but they didn't have a specific ruling from the IRS on it either way if this would be allowed. He said they had been asking the IRS for a specific ruling in this tactic for years and had never received a response. My accountant and pension consultant both said they no specific knowledge of whether this would be allowed or not, and didn't want to second guess the IRS.

I have gone over all of the IRS rules I could find on the topic and it seems like it would be okay, but if the IRS decides at a future date they won't allow it I don't know what the penalties might be.

I'm in the process of doing this - converting after tax 401(k) to Roth and rolling after tax earnings to a TIRA. I called the IRS and explained exactly what I'm doing and was given the go ahead. Fidelity also confirmed that they are convinced that it is kosher. The IRS rep's main criterion was that pretax monies stayed in a TIRA so the taxes would be paid eventually.

 

[MasterBlaster]

I asked Fidelity about this and the rep I talked to said they were allowing clients to do this, but they didn't have a specific ruling from the IRS on it either way if this would be allowed. He said they had been asking the IRS for a specific ruling in this tactic for years and had never received a response. My accountant and pension consultant both said they no specific knowledge of whether this would be allowed or not, and didn't want to second guess the IRS.

I have gone over all of the IRS rules I could find on the topic and it seems like it would be okay, but if the IRS decides at a future date they won't allow it I don't know what the penalties might be.

Since the IRS limits Roth 401k contributions to the $16.5k ( plus possible $5.5k catchup) it seems to me that this (loophole) is beyond the intent of the law. With this method one could put up to $49k (less company contributions) a year into a non-deductible 401k==> Roth IRA.

It doesn't pass the smell test to me.

But I will concede that there have been an awful lot of similar loopholes of questionable legality in the tax law. It seems like it takes em' about a decade or so to close the loophole.

I suppose the worst that could happen is that they make you re-characterize the bandit Roth IRA to a non-deductible (regular) IRA. In that case all of the earnings would then be subject to taxation.

 

[TooFrugal]

It seems like it takes em' about a decade or so to close the loophole.

You have to have a plan that allows after tax contributions, in service distributions, plus the ability to actually save the money, so there is probably a relatively small number of people who can actually do this. So it may not be something the IRS feels they need to address anytime soon.

 

[travelover]

You have to have a plan that allows after tax contributions, in service distributions, plus the ability to actually save the money, so there is probably a relatively small number of people who can actually do this. So it may not be something the IRS feels they need to address anytime soon.

I think this is exactly right. Not all 401(k) plans allow after tax contributions and most people can't afford to do it. anyway. In my case, I was saving like mad in the five years or so before I retired, and this seemed like a good way to defer taxes on the earnings.