Good Morning...I was just working on my 2009 taxes via Turbo Tax and noticed something I was not aware of/did not understand.
First...I was unaware of the ZERO % tax on LTCG for 2008 and 2009 when in the 5% or 15% tax brackets...sorry for the earlier post regarding tax harvesting of Capital Losses...I now see why it may nothave made sense for me to do so in either 2008 or 2009...water over the dam
However, I now see another impact of the 0% bracket...
1) Both my wife and I are self employed and had pretty good (part time) income in 2009. Clearly into the 28% Fed bracket.
2) We also both have Individual 401(k)s which allow for a post 12/31 deductible contribution...our max for 2009 is about $70,000.
3) I usually work with Turbo Tax to compute at what contribution level my tax savings starts to decline...and pick a level where I save let's say...around 25% Fed + whatever Minnesota I save.
4) When working TT this year I discover that as I contribute say $10,000 when well into the 28% bracket I save about 28%...obviously.
5) However, when I contribute enough to drop into the 15% bracket ($67,900)...let's say to reduce Taxable Income from $65,000 to $55,000 I find I save a greater amount than when in the 28% bracket...about 30%.
6) After first thinking TT had a computation error...I discovered that I saved both the 15% LTCG (by going to zero as I moved into the 15% bracket...AND I saved the 15% by reducing my taxable income by the same $10,000 extra 401(k) deduction...thus the roughly 30% Fed saving.
In my case...I will likely contribute the full amount as long as the Fed savings is close to the incremental 30%...+ Minnesota savings which is 7-8%.
QUESTION...by contributing nearly $70K to 401(k) from my "after-tax" accounts...along with prior years contributions...I am essentially saving 30%-35% NOW...but have nearly ended up with 100% of my reasonably substantial investment account...ALL in Pre-Tax accounts!
I am OK with this...as the alternative would be to pay 35% tax on it now. We are 62-63 years old and do not plan on either taking SS or drawing "much" out of investment accounts for maybe 3-4 years??
My "plan" is to control taxable timing to the extent I can when our earned income drops. I also assume taxable rates will not go down but will rise...but believe I will be OK if we eventually draw about $100K per year...ie; tax rates should not exceed the 35% Fed
Any thoughts? Do I see this 30% tax benefit/deferral incorrectly?