Tax avoidance/mitigation query

[Texas Proud]

2017ish- thanks....I had that same issue with the CPA' suggestion, just let payroll handle the additional tax contribution. I think I may re-think the ROTH 401k, seems the obvious low hanging fruit, then do back doors after FIRE in 2 yrs (both 57 now)

I also think that CPA is off suggesting to up your qtrly payment....

If it were me, I would recommend you NOT make any qtrly payment and up the withholding...


OR, if you do not mind making a big payment to just have enough taken out so you do not have to pay a penalty... who cares if you write a $11K or more check...

 

[COcheesehead]

OP doesn't have any taxable investments at this point (all W-2 income) so I would prefer taxable equities at 15% over a pie-in-the-sky whole life scheme (and BTW... I own whole life myself and used to work for a mutual insurer).

He is probably not at 15%. Higher incomes get hit with the 3.8% ACA tax, a state tax and maybe even an AMT. So it is more likely much higher. My cap gains rate, all in is closer to 27%.

 

[LOL!]

No RMD's in an annuity.
Future taxes are individual in nature so whose to say they won't be lower when you pull it out? It just creates another bucket you can pull from to blend into your future income stream.
Money left to ride long term in a deferred account usually outperforms a taxable account.

Also keep in mind, the gains are taxed. The original investment is not.

A few points:

LTCG are always taxed lower than ordinary income, so one will always have a lower tax rate on gains in a taxable account than in a deferred annuity. So everyone knows that taxes will "be lower when you pull it out" if one uses a taxable account.

I can see that "Money left to ride long term in a deferred account" might outperform a taxable account when the taxable account is not invested tax efficiently. But if the taxable account is invested tax efficiently in low-expense ratio tax-efficient passively-managed investments and left to ride long term, then there is no way a deferred account can outperform. Besides, if you die, the taxable account has even more benefits while the deferred gets taxed anyways.

Return of capital is tax-free, so I don't get what your last point was about since in a taxable account the withdrawal of the original investment is not taxed.

 

[COcheesehead]

A few points:

LTCG are always taxed lower than ordinary income, so one will always have a lower tax rate on gains in a taxable account than in a deferred annuity. So everyone knows that taxes will "be lower when you pull it out" if one uses a taxable account.

I can see that "Money left to ride long term in a deferred account" might outperform a taxable account when the taxable account is not invested tax efficiently. But if the taxable account is invested tax efficiently in low-expense ratio tax-efficient passively-managed investments and left to ride long term, then there is no way a deferred account can outperform. Besides, if you die, the taxable account has even more benefits while the deferred gets taxed anyways.

Return of capital is tax-free, so I don't get what your last point was about since in a taxable account the withdrawal of the original investment is not taxed.

I was talking about the original investment in the deferred annuity. That is what we were addressing so I thought that was clear, not talking about a taxable account.
In a perfect world we all would invest in the most tax efficient manner. I get that and agree with you. The challenge is sometimes we have legacy issues before we "saw the light" and thus have MF's with big cap gains built up. Selling creates a tax event so we work around them. Thus my point about donating appreciated shares. It gives a back door out of your mistakes.

Next is the rebalancing challenge. I found myself in a situation where I needed more bonds/dividends in my AA. I had the cash, but didn't want those in my taxable account, not at 33% and muni's can only go so far in filling out your matrix so investing in the deferred gives me the opportunity to move new cash into the areas I need to rebalance into. Just another piece of the puzzle.

 

[gregory r.]

Thanks to all for the quick replies. Have converted the Roth 401k to pre-tax, and will max everything out. Having payroll deduct an additional $250 per month, and will continue quarterly additional lump payments. I agree, not the worst of problems to have but still hard to swallow. Will wait till FIRE and do the Roth conversions. I will look at the other suggestions provided here as well, some I am not as familiar with. Thanks again all

 

[bingybear]

Yes, we plan to do some back door after FIRE since the tax brackets will be lower.

But if you retire and cannot contribute to a non-deductible IRA, than how do you do a back door Roth. You can just do roth conversions, but the back door roth is effectively gone. You likely need a long term view and plan. Not a year by year plan.

 

[Fedup]

Back door means, you contribute to non deductible IRA and then immediate convert to Roth IRA. This avoids the income limit.