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Legal tax advantaged retirement accounts (401k, IRA, etc...)
Old 05-05-2021, 09:03 AM   #1
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Legal tax advantaged retirement accounts (401k, IRA, etc...)

Hi guys and ladies,

This post is to help me/us learn about legal tax saving(s) strategies to limit taxes to as close to zero as possible.
-The mega company that I work for has a 401k (Traditional and Roth; 6% match immediate vested only in Traditional 401k and has S&P500 index but no option to invest in TSLA... this post is not about which stock is the right choice but only the tax savings strategies); I contribute 6% to the Traditional 401k for the match and 1% to Roth 401k (did not increase this one further because it does not invest in TSLA and I truly believe that whenever Tesla releases Full Self Drive (FSD) the stock will 10x (that might be excessive but it'll do MUCH BETTER than the tax savings... it already did that for purchases before the 5/1 split)
-I'm eligible for Roth IRA ($500/month investment maxed out in 2020 and continue that strategy until I can max it out faster for better returns)
-HSA ($3600 max per year with triple tax savings, recording medical expenses in Excel file, and believe no taxes for any withdrawals after 65(?) or for medical purposes
-Brokerage account (obviously taxable and, for me, currently contains 64 TSLA stock that has made 100+% returns; had many (not all) stocks since before the 5 for 1 split and practice DCA contributions
-Crypto (taxable +/-$24k Etherium (8.77) and $5k Bitcoin (.08)... this is newest investments and made around $3-5k profit so far, might buy taxbit.com ($50) this year to know exact profits and will try to keep better track of each investment; not planning on selling them for a while so taxbit.com might not be needed yet)... I sold my +/-72 MSFT taxable stocks to buy the crypto and it's already paid for the taxes and over double that. I'll still have to pay the MSFT taxes for 2021 taxes.

The overall question is how do I legally invest more money and legally avoid paying taxes (while maximizing returns... figure this part is obvious)?
-Possibly Roth conversions and pay taxes now on the 38 Traditional IRA TSLA stocks and 2 short-term Square stocks? (maybe not all of it but some of it; right now know that I already have a higher taxable 2021 due to selling 72 MSFT [think $1,000-$1500 taxes... only 5 short-term, 22 or 24% taxes, and the rest long-term, 15% taxes] and not sure if now is the time to do the Roth conversion)
-Possibly use tax-harvesting (not familiar with it and might not work well with my non-overly-diversified stock portfolio... I have multiple years to let the stock grow and fully believe in it; when TSLA dips in price how do I sell and purchase it again without causing a wash-rule besides waiting 30+ days and missing whatever happens in that time)
-Real estate, really want to do this but invested almost entirely in stocks and will have to sell a bunch which is not my plan; primary home (+/-$110k in equity; still +/-$350k mortgage); I'm in Paralysis by Analysis... lots of studying it and investing to increase networth but not taking the most important step of "action"... as Netflix founder/CEO said in an interview, no idea is a good idea until it is put into action (not quoted) because we all think we have good ideas until we see how well they work.

Now, I feel like I am just typing and typing. Will you please let me know your thoughts on how to maximize returns through reducing/eliminating taxes legally?
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Old 05-05-2021, 09:34 AM   #2
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Well for one, your savings... which is your financial future... has significant diversification risk... but you already know that and it seems that you have made a conscious decision to ignore diversification risk... which is fine... it's your money and your financial future. Just ponder this... what happens to TSLA if Elon gets run over by a bus this afternoon?

On the rest... tax minimization... welcome to W-2 land... other than the things that you are already on top of, you are stuck with just paying the piper.

One thing that I would do in your situation since you are in the 22-24% tax bracket is to max out the 401(k) and put it in the S&P 500 index... you save 22-24% currently in tax and the S&P will add some diversification to your overall portfolio. Just beware... while it is popular to do tax-deferred savings while working anticipating that you'll have a lower tax rate in retirement and benefit from the difference in tax rates (I am right now before SS and RMDs start... paying ~8-10% for Roth conversions where I saved 28%+ when I deferred that income), there is a chance that you may be more financially successful than you imagined and be in a tax bracket higher than 22-24% when you retire. My view is that either way you win... nothing wrong with being more successful than you expected.
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Old 05-05-2021, 10:32 AM   #3
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Originally Posted by FIREarly View Post
The overall question is how do I legally invest more money and legally avoid paying taxes (while maximizing returns... figure this part is obvious)?
It sounds like your questions is how do you invest more and avoid taxes while focusing on TSLA. Since you don't have a tax-deferred option for it, you cannot have your cake and eat it too.

Otherwise, the easy answer is to max your 401k beyond the 6% to the annual cap of 19,500.
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Old 05-05-2021, 10:42 AM   #4
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Originally Posted by pb4uski View Post
Well for one, your savings... which is your financial future... has significant diversification risk... but you already know that and it seems that you have made a conscious decision to ignore diversification risk... which is fine... it's your money and your financial future. Just ponder this... what happens to TSLA if Elon gets run over by a bus this afternoon?

On the rest... tax minimization... welcome to W-2 land... other than the things that you are already on top of, you are stuck with just paying the piper.

One thing that I would do in your situation since you are in the 22-24% tax bracket is to max out the 401(k) and put it in the S&P 500 index... you save 22-24% currently in tax and the S&P will add some diversification to your overall portfolio. Just beware... while it is popular to do tax-deferred savings while working anticipating that you'll have a lower tax rate in retirement and benefit from the difference in tax rates (I am right now before SS and RMDs start... paying ~8-10% for Roth conversions where I saved 28%+ when I deferred that income), there is a chance that you may be more financially successful than you imagined and be in a tax bracket higher than 22-24% when you retire. My view is that either way you win... nothing wrong with being more successful than you expected.
Appreciate your quick response and understand your input. Yes, diversification is not well achieved in my portfolio and I'm willing to take that risk, similar to how Amazon performed in early years and beyond.

The W-2 "issue" is real and I have a good paying job but feel stuck in the "Golden cuffs of corporate American." This is a self-inflicted decision. Maybe real estate will be my way out of this but the first investment property feels like the hardest one until it can prove, first hand, that it's worth it.
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Old 05-05-2021, 10:44 AM   #5
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Originally Posted by Aerides View Post
It sounds like your questions is how do you invest more and avoid taxes while focusing on TSLA. Since you don't have a tax-deferred option for it, you cannot have your cake and eat it too.

Otherwise, the easy answer is to max your 401k beyond the 6% to the annual cap of 19,500.
Thank you for your reply. Are there other tax-deferred options I'm missing besides Roth 401k?
For ex: when starting a company, what extra tax-deferred investment options are there?
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Old 05-05-2021, 12:26 PM   #6
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Two very minor points:

-You can, of course, invest in Tesla in your Roth IRA.
-You pointed out your uncertainty regarding HSA withdrawals; they are not free of taxes post-65 for non-medical uses. They are just penalty-free at that point.
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Old 05-05-2021, 01:41 PM   #7
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Two very minor points:

-You can, of course, invest in Tesla in your Roth IRA.
-You pointed out your uncertainty regarding HSA withdrawals; they are not free of taxes post-65 for non-medical uses. They are just penalty-free at that point.
In regards to HSA, if I continue to keep medical records paid out-of-pocket, those receipts can be used to take the money out tax-free after 65 but if not medical-related the money (capital gains) will still be taxed? Y/N
From what I've heard, medical bills go up with time and when paying for medical entirely on my own it will be much more expensive anyways. This leads to the thoughts of becoming an ex-pat (Portugal is the only one I've done any research so far on because there are multiple years before this step but one other person on here also spoke highly of Australia and its less expensive healthcare system)

There is always stashing money under the bed!! hahaha
Next thing you know, people will be storing Crypto under the bed!!
Yes, it can happen. They make offline storage devices for it
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Old 05-05-2021, 02:55 PM   #8
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Have you researched Enron and Worldcom? Seriously, don’t put too much in one stock. Many people lost everything looking for the “right” stock.
Most of the folks here gained their wealth going slow and steady with diversified portfolios.
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Old 05-05-2021, 03:07 PM   #9
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I would second what PB4uski said. Plan on doing conversions once you stop with the W-2 nonsense, and if you're in a higher bracket because you done so well it's a win anyway.
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Old 05-05-2021, 04:51 PM   #10
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I would second what PB4uski said. Plan on doing conversions once you stop with the W-2 nonsense, and if you're in a higher bracket because you done so well it's a win anyway.
Thank you, I need to "strengthen up" and take the ownership plunge. I've started a couple small companies and one of them is how I met my wife but they were nowhere close to a self-sufficient business. I treated them as part-time jobs and later closed both of them down (entirely separate times).
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Old 05-05-2021, 04:55 PM   #11
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Have you researched Enron and Worldcom? Seriously, don’t put too much in one stock. Many people lost everything looking for the “right” stock.
Most of the folks here gained their wealth going slow and steady with diversified portfolios.
I hear you and am definitely playing the more risky method but have a lot of faith in the future of our country, and the world, is EV. This is not to start a fanboy post about Tesla. You are correct that way smarter investors than me make their money via the S&P500 index. I truly believe Tesla will prevail, as it already has, as the dominant EV carmaker. This is not day-trading it either. It is set it, and forget it!

Your point about the S&P500 index is legit and I will maximize my index fund investing later on... definitely after FSD is released!

If I am a maverick and it "burns me" than you can use the and think,
"I tried to help him."
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Old 05-05-2021, 05:08 PM   #12
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I hear you and am definitely playing the more risky method but have a lot of faith in the future of our country, and the world, is EV. This is not to start a fanboy post about Tesla. You are correct that way smarter investors than me make their money via the S&P500 index. I truly believe Tesla will prevail, as it already has, as the dominant EV carmaker. This is not day-trading it either. It is set it, and forget it!

Your point about the S&P500 index is legit and I will maximize my index fund investing later on... definitely after FSD is released!

If I am a maverick and it "burns me" than you can use the and think,
"I tried to help him."

I sold my 100 shares of Tesla at $875. It was a small percentage of my holdings. I don’t invest in the S&P500, but have a mix of individual stocks and ETFs. Some of the ETFs have Tesla in their top ten holdings. I’m happy with that. Pigs get fat, hogs get slaughtered.
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Old 05-05-2021, 06:54 PM   #13
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Have you researched Enron and Worldcom? Seriously, don’t put too much in one stock. Many people lost everything looking for the “right” stock.
Most of the folks here gained their wealth going slow and steady with diversified portfolios.
+1

Post retirement I was burned by concentration, not by those names but some people who thought what pharma bro did was a good way to make money fast. Sadly my former Megacorp invested a large chunk of half my retirement in it. Thousands of people lost much of their retirement in this nonsense.

I truly believe in Tesla, I own a Y and some shares directly. I don't believe it's gains from growth offset the concentration risk. I wouldn't recommend jumping through hoops to concentrate in it.
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Old 05-06-2021, 02:32 AM   #14
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Investigate your 401K. It might have the attributes that allow the "Mega-backdoor Roth". The two things it needs to allow are non-Roth after-tax contributions and in-service withdrawals. If it allows both, you can legally use your 401K to shuttle up to $45K per year into a Roth IRA account. The majority of 401K's don't have the features, but a significant number of mega-corp plans do, especially for higher paid industries.
forbes.com mega-backdoor-roth.
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Old 05-06-2021, 06:00 AM   #15
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Investigate your 401K. It might have the attributes that allow the "Mega-backdoor Roth". The two things it needs to allow are non-Roth after-tax contributions and in-service withdrawals. If it allows both, you can legally use your 401K to shuttle up to $45K per year into a Roth IRA account. The majority of 401K's don't have the features, but a significant number of mega-corp plans do, especially for higher paid industries.
forbes.com mega-backdoor-roth.
Very good post!
It reminds me to reduce spending to increase retirement contributions and hopefully take advantage of this "Mega-backdoor Roth" option.
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Old 05-06-2021, 07:08 AM   #16
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I hear you and am definitely playing the more risky method but have a lot of faith in the future of our country, and the world, is EV. This is not to start a fanboy post about Tesla. You are correct that way smarter investors than me make their money via the S&P500 index. I truly believe Tesla will prevail, as it already has, as the dominant EV carmaker. This is not day-trading it either. It is set it, and forget it!

Your point about the S&P500 index is legit and I will maximize my index fund investing later on... definitely after FSD is released!

If I am a maverick and it "burns me" than you can use the and think,
"I tried to help him."
Candidly, your approach to Tesla sounds like a religious view more than an investment thesis. Don't fall in love with a stock. It won't love you back.

And you could be totally right on EV (but these vehicles can't save the world as some seem to believe) and totally wrong on Tesla. And have you noticed all the competition? It is coming with a vengeance. And then there is fuel cell, etc.

In any event, in my opinion, successful investing requires dispassionate analysis and steely eyed judgement. I am primarily an investor in individual stocks. And I judiciously avoid concentration risk.

Back to your question, I think you have identified many of the tools of investing in a tax-effective way. But you will have to pay taxes if you want to spend investment gains. We pretty much all try to keep taxes low by finding desirable years to add too and to pull from tax deferred vehicles, use of Roths, munis etc. It is just the prudent blocking and tackling of sound personal finance.

But many of us pay a lot of taxes. It is not something I love personally since government is so wasteful with my hard-earned cash, but it is a reality.

Best of luck to you!
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Old 05-06-2021, 07:18 AM   #17
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Candidly, your approach to Tesla sounds like a religious view more than an investment thesis. Don't fall in love with a stock. It won't love you back.

And you could be totally right on EV (but these vehicles can't save the world as some seem to believe) and totally wrong on Tesla. And have you noticed all the competition? It is coming with a vengeance. And then there is fuel cell, etc.

In any event, in my opinion, successful investing requires dispassionate analysis and steely eyed judgement. I am primarily an investor in individual stocks. And I judiciously avoid concentration risk.

Back to your question, I think you have identified many of the tools of investing in a tax-effective way. But you will have to pay taxes if you want to spend investment gains. We pretty much all try to keep taxes low by finding desirable years to add too and to pull from tax deferred vehicles, use of Roths, munis etc. It is just the prudent blocking and tackling of sound personal finance.

But many of us pay a lot of taxes. It is not something I love personally since government is so wasteful with my hard-earned cash, but it is a reality.

Best of luck to you!
Thank you for that well thought out message.

Yes, you are 100% correct stocks will not love us/you/me back.

IMO, EVs are the future and there is a lot of "competition." In regards to that, right now, EVs are roughly 2.5-3% of the car market. The true competitor to EVs is ICE (Internal Combustion Engines; gas cars). EVs have a long road from 3% to 50+%. That is why I still believe we are "early" in adopting to EVs. I'll stop typing about EVs because that was not the purpose for this forum post but I did mention it so it is fair game.

Yes, taxes will need to be paid and this is to learn about what other ways there might be to legally reduce taxes. From what I've read, real estate is a great source with 1031 exchanges and probably way more but that is not my area of expertise and looking for all of your thoughts.

Can't wait to cross $1 million and post it here in our anonymous forum posts!
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Old 05-06-2021, 01:00 PM   #18
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Originally Posted by FIREarly View Post
In regards to HSA, if I continue to keep medical records paid out-of-pocket, those receipts can be used to take the money out tax-free after 65 but if not medical-related the money (capital gains) will still be taxed? Y/N
From what I've heard, medical bills go up with time and when paying for medical entirely on my own it will be much more expensive anyways. This leads to the thoughts of becoming an ex-pat (Portugal is the only one I've done any research so far on because there are multiple years before this step but one other person on here also spoke highly of Australia and its less expensive healthcare system)

There is always stashing money under the bed!! hahaha
Next thing you know, people will be storing Crypto under the bed!!
Yes, it can happen. They make offline storage devices for it
Getting closer, but I don't think you have it quite right yet.

If you withdraw money from your HSA (at any age, before or after 65) for medical expenses that you have paid for (no matter how long ago), there are no taxes or penalties.

If you are over 65, you may withdraw money from your HSA for any purpose. There will be taxes on the entire withdrawal, much like a tIRA. (Remeber, your contributions to the HSA were pretax.)

Also, don't be sure that the favorable tax treatment will be recognized by Portugal. I am fuzzy on the details, but I believe I have read here that even Roth withdrawals are not free of tax for some ex-US locations.
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Old 05-06-2021, 01:49 PM   #19
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Originally Posted by FIREarly View Post
In regards to HSA, if I continue to keep medical records paid out-of-pocket, those receipts can be used to take the money out tax-free after 65 but if not medical-related the money (capital gains) will still be taxed? Y/N
From what I've heard, medical bills go up with time and when paying for medical entirely on my own it will be much more expensive anyways. This leads to the thoughts of becoming an ex-pat (Portugal is the only one I've done any research so far on because there are multiple years before this step but one other person on here also spoke highly of Australia and its less expensive healthcare system)

There is always stashing money under the bed!! hahaha
Next thing you know, people will be storing Crypto under the bed!!
Yes, it can happen. They make offline storage devices for it
Quote:
Originally Posted by Out-to-Lunch View Post
Getting closer, but I don't think you have it quite right yet.

If you withdraw money from your HSA (at any age, before or after 65) for medical expenses that you have paid for (no matter how long ago), there are no taxes or penalties.

If you are over 65, you may withdraw money from your HSA for any purpose. There will be taxes on the entire withdrawal, much like a tIRA. (Remeber, your contributions to the HSA were pretax.)

Also, don't be sure that the favorable tax treatment will be recognized by Portugal. I am fuzzy on the details, but I believe I have read here that even Roth withdrawals are not free of tax for some ex-US locations.
Thank you for the HSA information.

Even the fuzzy tax details about Roths possibly being taxed for some ex-US locations is interesting and I'll have to look into it.

Good looking out!
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