Where to put more money to save on taxes now or in the future

[hopefullyoneday]

Gonna retire in about 6 years. I am lucky enough to be making more money than I need and tax defer. I am currently maxing out my HSA, IRA (ROTH/TRAD), and may 457 plan. I am 49 yrs old and I am taking advantage of my works 457 option to double down the next 3 years so that will be 39k this year. I still have extra money I don't need at this time. Where else can I put it that will give me a tax advantage now or later in life. I currently have about 100k in a investment acct playing with stocks and making money there. I also have thousands of dollars extra each month that I keep adding to that stock account. Is there somewhere else I can put it that would be better for me to do so at this time. I read about a mega backdoor ROTH but don't think I can do that from what I have read. Any suggestions. Thanks
Greg

[RetireeRobert]

One idea, you could go with a municipal tax exempt bond fund such as Vanguard Intermediate Term Tax Exempt. If available for the state you live in, could go for a double (federal and state) tax exempt muni bond fund.

[hopefullyoneday]

Quote:

Originally Posted by RetireeRobert One idea, you could go with a municipal tax exempt bond fund such as Vanguard Intermediate Term Tax Exempt. If available for the state you live in, could go for a double (federal and state) tax exempt muni bond fund.

I live in TX, I will look into that, thank you.

[RetireeRobert]

Quote:

Originally Posted by hopefullyoneday I live in TX, I will look into that, thank you.

Texas, great! No state income tax in Texas as I recall.

So nearly any municipal bond fund would be free of federal income tax, such as Vanguards Municipal Intermediate Term Tax Exempt.

[Athermos4u]

Keep putting excess "after tax" cash in a retail brokerage account. One day you will be glad you have investments that aren't all tax deferred. It will help greatly with retirement income tax planning.

[mrfeh]

Quote:

Originally Posted by Athermos4u Keep putting excess "after tax" cash in a retail brokerage account. One day you will be glad you have investments that aren't all tax deferred. It will help greatly with retirement income tax planning.

+1

Although I don't suggest "playing" with stocks in that account. It is part of your portfolio, just like your retirement accounts.

https://www.bogleheads.org/wiki/Bogl...g_start-up_kit

[RunningBum]

Keep in mind that the goal really should be to maximize wealth, not minimize taxes. Also remember that the income you are deferring will eventually become taxed before you can spend it so there is such a thing as deferring too much income.

Buying and holding in an S&P 500 or total stock index fund or ETF is very tax efficient. It will throw off some dividends that are mostly qualified. When you finally need to tap them it will be taxed at favorable LTCG rates.

[Athermos4u]

BTW, I tend to use my retail account to take long positions in the market in order to minimize tax records and create long-term capital gains. I do my frequent trades, swing trading etc in my IRAs.

[hopefullyoneday]

Quote:

Originally Posted by RunningBum Keep in mind that the goal really should be to maximize wealth, not minimize taxes. Also remember that the income you are deferring will eventually become taxed before you can spend it so there is such a thing as deferring too much income.

But wouldn't it be easier to build wealth by deferring tax. For example I am in the 24% tax bracket now and will be until I retire. Then my income will be less than half of what it is now. So why not save 24% more of my money and invest, making money on that money at the same time. Then when I retire pay less tax because I will be in a lower income bracket. Or am I missing something?

[RetireeRobert]

Quote:

Originally Posted by Athermos4u BTW, I tend to use my retail account to take long positions in the market in order to minimize tax records and create long-term capital gains. I do my frequent trades, swing trading etc in my IRAs.

+1

[RetireeRobert]

Quote:

Originally Posted by RunningBum Buying and holding in an S&P 500 or total stock index fund or ETF is very tax efficient. It will throw off some dividends that are mostly qualified. When you finally need to tap them it will be taxed at favorable LTCG rates.

+1 on the "buying and holding". Whatever the investment, S&P 500 ETF or individual stock, dividend value stock or growth stock, find investments you like and would want to hold for the long term. You don't pay any taxes as long as you don't sell! Perhaps you hold until you are retired and in the lower tax bracket. Or perhaps you hold until the gain becomes long term capital gain and profit is taxed at favorable LTCG rate.

[Sunset]

Quote:

Originally Posted by hopefullyoneday But wouldn't it be easier to build wealth by deferring tax. For example I am in the 24% tax bracket now and will be until I retire. Then my income will be less than half of what it is now. So why not save 24% more of my money and invest, making money on that money at the same time. Then when I retire pay less tax because I will be in a lower income bracket. Or am I missing something?

A lot of folks thought that as well.

Check out what happens at age 72. That is when you have to take out ~3.6% of all IRA + 401K , in addition you will be getting SS and possibly a pension?
Plus your dividends and interest from regular investments.
It might be harder than you think, and it's a good thing, to stay in the 12% bracket.

[Bamaman]

After saving so hard, it sounds as if you need to spend a little of that $ on a good vacation.

[Badger]

Quote:

Originally Posted by hopefullyoneday But wouldn't it be easier to build wealth by deferring tax. For example I am in the 24% tax bracket now and will be until I retire. Then my income will be less than half of what it is now. So why not save 24% more of my money and invest, making money on that money at the same time. Then when I retire pay less tax because I will be in a lower income bracket. Or am I missing something?

I maxed out my tIRA, Roth IRA, and after tax investments for many years. We were very frugal and paid in the lowest tax bracket while we lived on one income. I even did backdoor Roth conversions for a number of years to just within the maximum amount but keep us in a low bracket. For the past few years I have been taking our RMDs and it has been a major tax burden with jumping 2 brackets. We now have more in our tIRA than when we retired and the RMDs are more each year and climbing. Not much I can do now except pay more taxes.


Cheers!

[RunningBum]

Quote:

Originally Posted by hopefullyoneday But wouldn't it be easier to build wealth by deferring tax. For example I am in the 24% tax bracket now and will be until I retire. Then my income will be less than half of what it is now. So why not save 24% more of my money and invest, making money on that money at the same time. Then when I retire pay less tax because I will be in a lower income bracket. Or am I missing something?

I wasn't giving specific advice for your situation, just a reminder of what to focus on. Some may defer so much they'll be in the same tax bracket during RMDs, and the tax rates are scheduled to return to higher rates in 2026. And there may be SS tax humps, IRMAA, lost subsidies, etc to consider, though all of those things may change by the time you retire too.

[TheWizard]

Quote:

Originally Posted by hopefullyoneday But wouldn't it be easier to build wealth by deferring tax. For example I am in the 24% tax bracket now and will be until I retire. Then my income will be less than half of what it is now. So why not save 24% more of my money and invest, making money on that money at the same time. Then when I retire pay less tax because I will be in a lower income bracket. Or am I missing something?

You may or may not be missing something, depending on timing. I did similar, maxing out my tax-deferred 403(b) contributions back when I was in the 28% marginal Federal Income Tax bracket.

But I wanted roughly the same after-tax income in retirement to allow me to carry on in style, to a degree.
So I worked a bit longer than some folks might have.

After eight years of retirement now, I've got higher AGI, taxable income, and total tax than I ever did when working, even though I'm in the 24% bracket now.
But I'm okay with my situation...

[hopefullyoneday]

Ok, lots of good advice. Let me provide a little more specifics. The wife and I currently make about 200k total. With all the deductions and write offs our AGI is around 126k total. When we retire in about 6 years she will be 51 and I will be 56. She will have no income except for 401k from her work. I will have a pension of around 75k. I wont get much SS as my pension from the Fire dept will knock the SS benefit to only a couple hundred per month. So until she can draw her 401k and SS our income will be just mine. Which is why I am kinda thinking deferring as much now is the better choice. Do you all agree?

[GTFan]

After I maxed out IRA/Roth/401k etc. the answer was simple, I dumped the rest into a market index fund. S&P 500, Total Market, whatever. You're going to have cheap taxes on divs and no taxes on CGs until you need the money, so keep doing that.

It helps a lot to have a mix of taxable, tax-advantaged and tax-deferred when you retire. Much more flexibility on how you can use the investments to pay for your lifestyle, especially since you plan to retire before 59 1/2.

[Animorph]

After you retire, you'll probably need more than $75k/year. While there are some ways to access 401k's after age 55, and tIRA's before 59.5, You probably don't want to do that.

Your taxable brokerage account (I assume the brokerage account is taxable) is the ideal way to bridge your income gap until all the other income sources start up. Spending from taxable allows you to keep your money in your tax deferred accounts, especially the Roths, for as long as possible. This is something that should be planned for, to ensure you have enough to make it past at least age 59.5.

Having said that, you do want to get the money out of the tax-deferred accounts at the lowest tax rate(s) you are allowed. Generally this means leveling the withdrawal amounts + income taken each year, including years when you are forced to take RMD's. You can keep those withdrawals in your retirement accounts by doing them as a Roth conversion. That has the added benefit of adding a bit of your taxable account to the Roth account, when you pay the conversion taxes from your taxable account.

Here's the way I look at Roth conversions:

Withdraw $1000 from a tIRA, pay 20% of it in taxes so now you have $800. Add $200 from your taxable account and put the $800 + $200 = $1000 into a Roth account. That's a Roth conversion, though normally it's a simple $1000 transfer and taxes are paid later from a taxable account.

Mathematically, if you always have to pay 20% in taxes, $1000 in a tIRA is the same as $800 in a Roth account. Both net you $800 after-tax dollars. But you were also able to add $200 from your taxable account and put it into the Roth, where it now grows tax-free until you have to withdraw it.

While you may not be able to contribute more to your tax-favored accounts now, by spending only from your taxable accounts and performing Roth conversions, to the extent that they are beneficial to you, you will delay any retirement withdrawals as long as possible and move some of your taxable account money into a Roth.

[hopefullyoneday]

Animorph

Great advice, thank you.