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No tax shelter at all
Old 10-02-2019, 12:06 PM   #1
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No tax shelter at all

Not sure if this is the right place for this post or not, it is mostly related to handling money, but not totally a retirement question.

I just turned 50, and my DW is 45. We have no mortgage, no debt what so ever. Our 401k's are mostly pre-tax dollars, but recently we switched to 100% Roth 401k. We have absolutely no shelter to taxes by doing so. Our household income is approximately $200k annually. When I think about taxes, I feel like a chump in the ring, hands down, taking a prize fighters punch to the face.

Is this just the way it is, when we have a simple, two income, no debt, no business life? It seems that the Roth option is a must do because of the lack of taxes later, lack of RMD and the ability to allow for inheritance of the money. I do not intend to retire really early, maybe around 62 or so. I do intend to retire in a position that our investments continue to grow beyond what we take out for our lifestyle.

Is it worth it to talk with a tax guy and learn something, or is it simply that without mortgages, my own business etc, I just pay those taxes?
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Old 10-02-2019, 12:21 PM   #2
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When I was working we were in a situation similar to you since I was a W-2 employee that had a high income.... just fill out the forms and take it.

That said, I maxed out my 401k and HSAs since I was saving a little... deferring at what today would be the 24% tax bracket and 7% state so 31% combined ... now (from ER to when SS starts) paying 11% federal plus 4% state.... when we are 65 we will move so 4% state will go away.... and once SS starts 18% (some at 12% and the rest at 22%).

So, we'll save 13% in the long run and much more in the short term.

As a general rule, if your current marginal tax bracket exceeds your expecd marginal tax bracket in retirement then tax-deferred savings is preferable... IOW, I would question the wisdom of changing from tax-deferred savings to after-tax tax-free savings.
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Old 10-02-2019, 12:21 PM   #3
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We also do Roth contributions, for similar reasons. Can you contribute to an HSA? Otherwise, do you have your investment options tweaked so that you're not paying ordinary income tax rates on everything (provided that's the best option for you, of course)?
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Old 10-02-2019, 12:22 PM   #4
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A Roth is certainly nice later, but you are probably in the 32% tax bracket now, right? Are you really going to be in that bracket later? Better to get a 32% tax break now and maybe pay 22% later.

I don't follow how a Roth gives the ability for inheritance. A regular 401K can be inherited as well. The heir just pays taxes on it. Right now it can be spread out over their lifetime, though changes are being considered that may reduce it to 5 or 10 years.

Once retired, before you hit RMD age, you could convert some of it to a Roth. The idea is to spread income over your years as evenly as possible.

Since the recent tax law changes, many of us are just taking the standard deduction. That's a tax shelter in itself. I don't worry about how much I'm paying in taxes, I worry about how to optimize my money. To get a tax shelter, often you have to do less optimal things with your investments. The net of it may or may not be better.

For your boxer analogy, at $200K income and no debts, you're dishing out a lot of good punches yourself. Sure, the tax man gets in a shot now and then, but you're winning the fight, right?
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Old 10-02-2019, 12:26 PM   #5
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Once retired, before you hit RMD age, you could convert some of it to a Roth. The idea is to spread income over your years as evenly as possible.
This really helps, as a simple reminder for the methodology of converting etc. Saving on the taxes up front and then converting during the times I am drawing less income, or may not be earning much. I knew the steps, but this is a simple clarification for the reason to do it. Thanks
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Old 10-02-2019, 12:28 PM   #6
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A Roth is certainly nice later, but you are probably in the 32% tax bracket now, right? Are you really going to be in that bracket later? Better to get a 32% tax break now and maybe pay 22% later.

I don't follow how a Roth gives the ability for inheritance. A regular 401K can be inherited as well. The heir just pays taxes on it. Right now it can be spread out over their lifetime, though changes are being considered that may reduce it to 5 or 10 years.

Once retired, before you hit RMD age, you could convert some of it to a Roth. The idea is to spread income over your years as evenly as possible.

Since the recent tax law changes, many of us are just taking the standard deduction. That's a tax shelter in itself. I don't worry about how much I'm paying in taxes, I worry about how to optimize my money. To get a tax shelter, often you have to do less optimal things with your investments. The net of it may or may not be better.

For your boxer analogy, at $200K income and no debts, you're dishing out a lot of good punches yourself. Sure, the tax man gets in a shot now and then, but you're winning the fight, right?
Yes, it does feel like we are winning the fight. We have a good lifestyle and can make some good investments. I have not spend much time at all in researching taxes and feels like I should be doing something. There may not be much to do!
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Old 10-02-2019, 12:30 PM   #7
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We also do Roth contributions, for similar reasons. Can you contribute to an HSA? Otherwise, do you have your investment options tweaked so that you're not paying ordinary income tax rates on everything (provided that's the best option for you, of course)?
We do have an option for an HSA, but it is only available with our high deductible policy. I should research it some more. It was going to cost more going that route due to some of my medications that would increase in price with the plan change. It would allow me to shelter a little money from taxes now and we will always have medical costs in the future to spend it on.
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Old 10-02-2019, 12:34 PM   #8
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When I was working we were in a situation similar to you since I was a W-2 employee that had a high income.... just fill out the forms and take it.

That said, I maxed out my 401k and HSAs since I was saving a little... deferring at what today would be the 24% tax bracket and 7% state so 31% combined ... now (from ER to when SS starts) paying 11% federal plus 4% state.... when we are 65 we will move so 4% state will go away.... and once SS starts 18% (some at 12% and the rest at 22%).

So, we'll save 13% in the long run and much more in the short term.

As a general rule, if your current marginal tax bracket exceeds your expecd marginal tax bracket in retirement then tax-deferred savings is preferable... IOW, I would question the wisdom of changing from tax-deferred savings to after-tax tax-free savings.
I will need to check on the tax tables again. From what I remember, I thought that we were just under the amount (after the standard deduction) to stay at 22% ) and that we would jump up into the 30ish % range in the next year or two, pending changes. I do not remember if that was before or after we stopped investing in the tIRA. I am at work, and thought to ask the question off the cuff. I could provide more information with a bit of research.
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Old 10-02-2019, 12:38 PM   #9
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I am in the same boat.
You just need to minimize tax events.
For taxable accounts keep your equities in tax efficient ETF's and bonds in muni's. Look to make donations from appreciated shares and not cash or contribute to a charitable giving account. That will reduce your cap gains when you sell in the future. Explore a deferred annuity as a shelter. Don't do Roth conversions yet. See if bundling deductions into alternating years might bump you over the standard deduction at least once in a while.
There is no magic. I send Uncle Sam almost 6 figures in taxes every year.
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Old 10-02-2019, 12:51 PM   #10
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I will need to check on the tax tables again. From what I remember, I thought that we were just under the amount (after the standard deduction) to stay at 22% ) and that we would jump up into the 30ish % range in the next year or two, pending changes. I do not remember if that was before or after we stopped investing in the tIRA. I am at work, and thought to ask the question off the cuff. I could provide more information with a bit of research.
Below is the 2019 tax table. If your income is $200k and you use the standard deduction of $24.4k your taxable income would be $175.6k and your marginal tax rate would be 24%. So if you had $20k of tax deferred savings your taxable income would be $155.6k and you would be in the 22% tax bracket and the $20k of tax-deferred savings would save you $4,544 in taxes (22.7%).

If when you withdraw that money you pay less than 22.7% in tax, then you are ahead.

Tax rateSingleMarried, filing jointlyMarried, filing separatelyHead of household
10%$0 to $9,700$0 to $19,400$0 to $9,700$0 to $13,850
12%$9,701 to $39,475$19,401 to $78,950$9,701 to $39,475$13,851 to $52,850
22%$39,476 to $84,200$78,951 to $168,400$39,476 to $84,200$52,851 to $84,200
24%$84,201 to $160,725$168,401 to $321,450$84,201 to $160,725$84,201 to $160,700
32%$160,726 to $204,100$321,451 to $408,200$160,726 to $204,100$160,701 to $204,100
35%$204,101 to $510,300$408,201 to $612,350$204,101 to $306,175$204,101 to $510,300
37%$510,301 or more$612,351 or more$306,176 or more$510,301 or more
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Old 10-02-2019, 01:02 PM   #11
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We do have an option for an HSA, but it is only available with our high deductible policy. I should research it some more. It was going to cost more going that route due to some of my medications that would increase in price with the plan change. It would allow me to shelter a little money from taxes now and we will always have medical costs in the future to spend it on.
If you qualify to contribute via payroll deductions, you'll save on SS and Medicare taxes, too.
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Old 10-02-2019, 01:04 PM   #12
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I was mistakenly looking at the single brackets. That 22% bracket may revert to 25% in retirement, so Roth vs regular 401K is just a 1 or 2% difference one way or another, more or less a wash. That's if you're sure you'll be in the 22% bracket and not 12%.
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Old 10-02-2019, 01:05 PM   #13
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Below is the 2019 tax table. If your income is $200k and you use the standard deduction of $24.4k your taxable income would be $175.6k and your marginal tax rate would be 24%. So if you had $20k of tax deferred savings your taxable income would be $155.6k and you would be in the 22% tax bracket and the $20k of tax-deferred savings would save you $4,544 in taxes (22.7%).

If when you withdraw that money you pay less than 22.7% in tax, then you are ahead.

Tax rateSingleMarried, filing jointlyMarried, filing separatelyHead of household
10%$0 to $9,700$0 to $19,400$0 to $9,700$0 to $13,850
12%$9,701 to $39,475$19,401 to $78,950$9,701 to $39,475$13,851 to $52,850
22%$39,476 to $84,200$78,951 to $168,400$39,476 to $84,200$52,851 to $84,200
24%$84,201 to $160,725$168,401 to $321,450$84,201 to $160,725$84,201 to $160,700
32%$160,726 to $204,100$321,451 to $408,200$160,726 to $204,100$160,701 to $204,100
35%$204,101 to $510,300$408,201 to $612,350$204,101 to $306,175$204,101 to $510,300
37%$510,301 or more$612,351 or more$306,176 or more$510,301 or more
Yep, that seems about right. I am betting that without any tax deferred investing this year, I will have a small amount of money that is taxed at the 24% rate, and it will get worse each year. Thank you for the information and the clear explanation. I will admit that I often get lost in some of the posts on this forum through all the acronyms and financial items that I have not dealt with yet in my life. This was very clear.
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Old 10-02-2019, 01:28 PM   #14
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Suck it up, buttercup. That is they way it is. If you quit work, you can be classified as low income and reap the many benefits.

That is one reason why I quit work. There is no incentive to work anymore.
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Old 10-02-2019, 02:54 PM   #15
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I also am stuck. Between our SS and pensions, plus my RMD, we are at $140 K in income, not even mentioning investments.
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Old 10-02-2019, 03:32 PM   #16
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Just remember that the current tax rates are due to expire in 2025 so while 24% may seem high compared to 12% some on this post are paying, if you end up in a 35% bracket when accessing the TIRA assets. I’m converting enough each year between now and 70 to put some in 24% bracket. While it may seem crazy to some, and may turn out to be a poor choice I can’t see federal taxes doing anything but going higher.

Of course, there is a reason I didn’t make a living from advising on such topics.
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Old 10-02-2019, 03:44 PM   #17
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Taxes are the lowest they've been and me thinks they will be going up too. I'd max the 401 and the Roth.

Not to mention rejoice in your high incomes!
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Old 10-02-2019, 03:47 PM   #18
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Just remember that the current tax rates are due to expire in 2025 so while 24% may seem high compared to 12% some on this post are paying, if you end up in a 35% bracket when accessing the TIRA assets. Iím converting enough each year between now and 70 to put some in 24% bracket. While it may seem crazy to some, and may turn out to be a poor choice I canít see federal taxes doing anything but going higher.

Of course, there is a reason I didnít make a living from advising on such topics.
Good point and that was part of my decision. I really need to start seeing what it is going to cost to live. I plan on upping my lifestyle when I retire and likely withdrawing more annually in retirement than I earn now. I also expect taxes to increase.
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Old 10-02-2019, 03:56 PM   #19
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Taxes are the lowest they've been and me thinks they will be going up too. I'd max the 401 and the Roth.

Not to mention rejoice in your high incomes!
+1000. I'm at a loss for words. Humble brag perhaps?
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Old 10-02-2019, 04:21 PM   #20
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It's a good problem to have. There was a time in my life when we were in the 35% federal tax bracket and 7.85% state tax bracket and subject to the AMT. We did everything we could to shelter income - I maxed out the 401k. The young wife had both a 403b and a 457 plan and she maxed both of them. We could not contribute to a Roth because our income was too high, but I did get a very large whole life insurance policy (paid in over more than 7 years to avoid the MEC limits) so that at least the earnings on the cash value would be tax deferred. We put taxable fixed income investments into muni-bond funds. Despite all this, we still ended up paying six figure taxes every year. But I always thought life was pretty grand all the same.

A move to public service with an accompanying gigantic reduction in pay then resulted in us having a gross income closer to yours. At that point, it was just a matter of tax bracket arbitrage. We contributed to our 403b and 457 just enough to lower our MAGI to the top of the 22% (25% prior to 2017) bracket, because we predicted that we would be in the 22% bracket in retirement.

Our plan now that we have retired is to Roth convert from our IRA/401k/403b every year up to the top of the 22% bracket (or, when the time comes, the RMD amount, whichever is greater).
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