I'm in the same bucket. Making much more than I'm going to be spending in retirement and right on the bubble of tax brackets. However you don't pay the higher taxes on all your earnings, you just pay the higher bracket on whatever you go over into the next bracket so it's not as bad as all that.

That’s reminds me of when I was a teen and my buddy was working at the local hardware store. They were going to give him a raise and told them to take it back because it would push him into a higher tax bracket. I’m sure the store owners were laughing about it behind closed doors. 30 years later and that old friend still doesn’t know anything about money. Of course, his parents are much the same....

You only pay the higher rate on earnings above the threshold not ALL your earnings.

If you are only $20k into the next tax bracket you only pay the higher tax on that amount (not ALL your earnings).

Also look into Tax Loss Harvesting (TLH) if you do have any investment losses you can sell those stocks and offset them against LT or ST gains (depending on what type of loss it is).

Some IRA's will allow you to trade options and or your high reward trading inside a IRA so you won't get as much Short term gains in taxable.

I think the difference here is that many landlords have a mortgage on their rentals that still need to get paid. The person with a job doesn't. $2000/mo in rent sounds better than $0 income from a job, until you factor in a $4k mortgage the landlord may have on all his properties that are now 40% vacant in your example.

I'm a big fan of contributing to a ROTH but understand that doesn't effect your taxable income. That's all post-tax money. If you contribute to a Traditional IRA it would lower your taxable income. And congrats on maxing your contributions!

Nothing that happens inside your IRA has taxable consequences. It's literally "What goes in gets deducted from your taxable income that year, what comes out gets added to your taxable income that year". You can trade every day in an IRA (which I don't recommend!) and there would be no taxable event.

If you max your 401k, you won't be able to deduct an IRA contribution. Perfect opportunity to contribute to a ROTH IRA. It won't lower your taxable income though.

Have you considered starting a business? Could be an opportunity to write down some expenses, or operate at a loss..

Hey OP, without knowing your specific circumstances, here are some general things for you to consider:

Understand the tax brackets and how they work. That appears to be new info to you, but should help ease your mind.

People mentioned charitable donations. Keep in mind, that does not just have to be cash. Clothes, appliances, etc. There are calculators out there for helping to value your donations. Get receipts.

Maximize deductions. Medical, schooling, unreimbursed work expenses, etc. This is all dependent upon if you itemize or just take the standard deduction. If you itemize, you tend to have greater avenues to explore.

If you have your own business, there are a variety of things that you can expense to lower your tax burden.

I would probably recommend talking with an accountant if you really want to get into this topic. Keep in mind, a lot of this depends upon your income level and goals.

As your income and assets appreciate to certain levels, you can start looking at ways to pass wealth to your family through things like trusts.

Keep in mind, getting bumped from one tax bracket to another means that you are making more money. This is a good thing, and something to keep in perspective.

Certain situations can have tax advantages where buying a vacation house, boat/rv, or a rental property make sense. Would recommend talking to a professional on these matters.

I agree that charitable contributions are not helping to save for retirement as you will always be saving less by giving away money so this is not a hack to save money but they say you can gift shares of stocks that you can deduct (gift value) the full amount so you will get more bang for your buck than gifting cash.

Say you have $1000 of stocks that you paid $10 for if you sold the stock to and gifted cash you would have to pay tax on $990 of gains whereas if you gift the shares you would not pay any capital gains.

I would personally recommend against it unless you put in your entire investment at once, and know that you won't need it for 5 years minimum.

The good:

I've gotten a little over 7% returns over the past 3 years.

The bad:

After 90 days, your investment is locked in with a 3% penalty for early withdrawal.

Aside from choosing your initial investment type, there's little you can do to allocate funds to specific REITs, so what happens is that future contributions or dividends get put into an REIT that is just starting up and won't do shit for returns for a year or two.

I would personally recommend either putting the entire amount you plan to invest in at once and don't reinvest dividends, or stick to exchange traded REITs.

Actually, you CAN deduct you IRA contribution if you max your 401k but like most deductions there are income limits.

https://www.irs.gov/retirement-plans/plan-participant-employee/2020-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work

Yuk....

And you can't even contribute to a Roth without a back door if you make over $206k as an agi for married and 139k for single. The nice thing about Roths imo is that you can withdraw the principle penalty (and obviously tax) free so if you're trying to bridge the gap from early retirement to 59.5 y/o it can be a handy resource if needed.

The tax strategies can be its own mammoth thread.

One of the (many) factors to consider with the US progressive tax system is that the brackets are not linear. Sales taxes (say 7%) are linear and the tax applies the same to taxable items whether it costs $1.00 or $1,000,000.

With taxes, as the taxable income increases the amount of taxes *above* each threshold increases at a different rate. (Quick note: Taxable income is *not* the same as your income).

Percent Rates of 10, 12, 22, 24, 32, 35, 37 are the 2020 IRS values for taxable income.

For simplicity, let's suspend the concept of standard and itemized deductions, social security withholdings, retirement contributions etc. for now. Like in the hardware store kid example, you are simply wondering what happens of you get a raise.

*IMPORTANT* The actual math and tax calculations below are more complicated than what I am showing, but I wanted to keep it simple to help people understand the effects of progressive rates across brackets. There is a gross simplification that all money is being taxed and the tax levels are approximate for easy calculation.

Here we go:

Suppose you are single and you make $40,000 per year and are in the 12% bracket. That means $40,000 x 0.12 = $4800 is paid to IRS in taxes.

One day your boss offers to double your salary to $80,000.

Someone told you the next tax bracket is 22% for a single person making over $40,000 so you don't want to make more than that because you pay more taxes.

You might be thinking at 12% I would have payed $9600 in taxes. But now at 22% I have to pay $80,000 X 0.22 = $17,600. This is incorrect.

This is where some people get confused.

The 22% ONLY applies to the amount over the $40,000. So the first $40,000 is taxed at 12%, so you owe $4800 on that. The next $40,000 is taxed at 22% so you owe $8,800 on that portion for a grand total of $13,600.

You have paid $13,600 in taxes on a salary of $80,000. This amounts to $13,600/$80,000 = 17% of your income. (Sometimes this is referred to as an "effective rate").

You still have made more money than in the days you were making $40,000 !

Then you heard people talking about 6 figure salaries. So you decide to find a job that pays $100,000. You also found out that once you pass $85,000 you now move into the 24% bracket.

Using your newfound knowledge, you know that does not mean you pay $100,000 X 0.24 = $24,000. But you also know it is going to be more than you paid when you were making $80,000.

You will owe $85,000 X 0.22 = $18,700 on that portion and then another $15,000 X 0.24 = $3600, for a total of $22,300.

Your effective rate is $22,300/$100,000 = 22.3%

(Maybe you are thinking..I sure miss those 12% days).

Well, once you went past the 6 figure mark, you started dreaming it would be nice to say you are making a Quarter MIL per year. ($250,000)

A little research shows that puts you into the 35% bracket.

You would owe $207,000 X 0.32 = $66,240 on that amount and on the remaining $43,000 you owe $43,000 X 0.35 = $15,050 for a grand total of $81,290.

Your effective rate is $81,290/$250,000 = 32.5% which is almost 1/3 of your salary. Imagine if you only had to pay 12% on that 250K...

(Now it hits you: holy cow, I am paying more in taxes than I made in total back in the day when my boss doubled my salary to $80,000)

----end of examples----

As is hopefully clear, the more you make, the more that is taken and it is NOT LINEAR. Of course regardless of which bracket you end up in, you are still making more money. (This is the key concept)

The reality is that you are just not making as much (per dollar) as you were in the previous bracket. So rejecting a raise based on being in a higher bracket doesn't make sense for the average person.

If someone offers you more money for the same work, take it.

Now I will end this by saying there are tons more factors to consider and there are numerous ways to reduce your tax burden. The above is just meant to illustrate the math of the progressive tax bracket system.

Hope that helps someone.

Touche, I was under the incorrect assumption that you couldn't deduct IRA contributions if 401k contributions exceeded deductible IRA contribution. Thanks for the clarity!!

Fun times with taxes.

Also with Social Security distribution can be tax free or it can taxed (up to 85% of your SS can be taxed).

So you don’t want to collect SS when you are still working which a lot of people do.

https://chambersfinancialgroup.com/blog/what-is-the-social-security-tax-torpedo

Thinking about converting a portion of my ROTH IRA to a checkbook controlled self-directed IRA to purchase some rental real estate. Does anyone have any experience with a self directed IRA? Any recommendations for custodians?

There is a LOT of bad info and misunderstanding out there, especially around ROTH IRAs. I've seen seemingly conflicting info on the IRS website! And when our tax code is 28T pages long it gets a little messy to sort and remember.

Dont assume that you need to avoid HSA unless youve looked into it. our HSA has a max out of pocket cost of $6k/yr and we can save $7200 a year in the account. meaning worst case scenario we only save $1200 a year while still enjoying the full $7200 tax break.

also many folks confuse HSAs with FSAs, (health savings vs flexible spending) which are entirely different animals, and i would agree that the FSA route is probably not worth the effort.

HSAs (as long as they provide 100% coverage beyond your deductible and max out of pocket) are typically far cheaper premiums than what you will pay with other options. the bennefits with many plans are simply as good, but for less cost. it costs less because you assume the liability of covering the deductible that you already reap a tax break on.

the kicker is that if you dont use the HSA money it effectively becomes another retirement account. that $7200 annually adds up quickly over the years, even if you do have to spend a few grand on deducitbles here and there.

A US Army LTC with over 20 years will make half of thier base pay. Base pay currently is around $9000 a month. So, they will make at least $4500 a month in retirement.

Agree 100%. The way the math works in my company's plans is that the net effect of paying the higher premium for the lower max out of pocket vs the lower premium for the higher max out of pocket max was within $38 of each other if you maxed out for the year. The only difference being that you have to have the money to pay it out of pocket instead of essentially being on a payment plan for it all year through your premiums. The other major difference obviously being that you only pay for it (again the same amount or at least within $38 of each other) if you actually need it vs paying for it "just in case" every paycheck and then the money evaporates if you don't end up needing it. Then you have the added benefit of the HSA account of which my company contributes $200 for single and $400 for family annually... and of course of all tax/retirement benefits that come with it.

Again check the details for your own available plans and do the math but very often high deductible plans get a bad rap as people think they are somehow "lesser" coverage. While it's true they may not cover things that are less common like physiatrist visits or 20 visits to the chiropractor every year, many people never use 95% of the benefits that they are paying for and it ends up just being emergency type of insurance anyway. They are just paying way more for it.

The basic formula for most active duty retiring now is High 3 (the average of your last three years) X 2.5%, so 50% at 20 yrs, 75% at 30 yrs, and 100% at 40 yrs. A LTC (O5) maxes out the pay scale at 22yrs, currently $10,111 ($66,733 a year retirement with 22 yrs), a COL (06) maxes out the pay scale at 30 yrs currently $12,638 ($113,742 a year with 30 yrs). Enter the Army at 18, retire a COL at 30yrs and 48 yrs old with a $113K retirement.

For the reserves, not quite as good, based on a point system and the same base pay as above. It also doesn't pay until 60 (or sooner based on deployments after Jan 2008). but a COL with 4,000 pts and over 30 yrs will still bring in over 40K a year retirement.

And lets don't forget the real benefit - Tri Care health insurance, active duty eligible on retirement to keep, and reserves at age 60. This is worth at least $8-12K per year with super low out of pocket.

Oh, and yes, you can still collect SS too.

You can work a full time job too... and alot of these folks are collecting full military disability.

I only did 5 years so I didn't retire, but alot of people around me are collecting full military retirement, full military disability, and working a full time job. Some transition into the government sector and work until they qualify for a pension as well and end up with 3 separate retirement pensions, social security, and their personal savings.

Even if you don't qualify for retirement and served after September 11th, you can utilize your post 9-11 GI bill for free schooling... with a housing stipend that varies by location but is generally about $2,000 per month tax free. I went into the Marines with my degree already, but have gotten 2 masters using my G.I. bill, and am using the last of my benefits to get a bachelor's of history for fun. I should have 1 day of benefits left when I'm done in August.

I used my GI Bill (called the Veteran's Education Assistance Program, VEAP) for me when I got off active duty in 1985. Later, my benefits were extended under the Montgomery GI Bill program after deploying to Afghanistan as a National Guardsman - I transferred this to my kids and they got to use it for college. Both had full ride scholarships (educational and military/veteran related), so tuition was already covered, and they just used the housing portion.

As a Guardsman with over 35 years, I won't bring in the same pension as a full active duty retiree. However, I will have 5 retirement streams not counting investments or my spouses 401K:
401K from 20 yr career as an AE consultant/owner; Federal pension @ 62 from 5 yrs of federal service plus 4 military I "bought" back; SSN with over 30 qualifying years (so no reduction for the Windfall Elimination Provision); Military pension at 59 (Senior Officer over 30 with 5 yrs active duty in addition to reserve time); and one in progress for State (university). While I am getting close to retiring from the Military, I like my civilian job and have no plans to retire any time soon from that. I feel the time I get back from the Military retirement will seem like a full time retirement, at least for a few years

I don’t have advice on the funds, but FYI you may be able to start drawing on 401k without penalties at age 55 depending on your situation.
https://www.google.com/amp/s/www.forbes.com/advisor/retirement/rule-of-55-retirement/%3famp

Very few mutual funds beat the S&P 500 index over time, especially when fees and taxes are taken into account. Mutual funds tend to have distributions at the end of the year because the fund manager has churned positions, incurring a tax liability for shareholders. S&P Index funds are very low cost, have lower tax liabilities and outperform almost all active fund managers over time. Vanguard is a good one.

I use vanguard index funds S&P500 or Total Stock Market fund.

However nothing that is invited in equities will guarantee a consistent return. You can look at past performance but that doesn’t say what the future returns will be. Likely since we have had 10+ great years we will be looking at some pretty down years in the future.

Here’s a graph the worst year for the S&P500 index was minus 42%, that just counts a calendar year so real one year loss has been even more.

Edit: I just looked the worst one year loss has been 48% (March 08 to March 09). This is why I’m not keen to retire any time soon because bonds and cash are not beating inflation and stocks might have a serious correction as soon as I retire. Everyone is loading up on equities because there is nothing else (bonds are not what they used to be). Both Stocks and bonds have over performed so they are both due to underperform their average return rate.

B1B366D2-0D07-4A7B-A657-40B5715C2713 (resized).jpeg

These are my top earners in my work work roth ira:

FOCPX
FIDELITY OTC PORT

FSPTX
FIDELITY SELECT TECHNOLOGY

FBGRX
FIDELITY BLUE CHIP GROWTH

"Growth fund" and "consistent returns" are a tough combo. By nature growth funds are going to fluctuate quite a bit. The Growth Fund of America (AGTHX) is probaby my overall favorite fund. It has a solid 40+ year track record. Usually it's about as volatile as the S&P500 but has outperformed it over time, especially during bear markets.

Don't forget you can withdraw your ROTH contributions at any time, for any reason, with no tax or penalty. The growth generally needs to stay in until 59.5.

The key to success you start early I’ll be diligent. At 68 it seems only yesterday when I developed my plan in 1981. The first 10% of my income went to the church, maximizing my retirement plans, developed a planned amount that paid for my house before my first child went to college, purchased life insurance that would complete my plan should I die early. I made the personal choice to my whole life with MassMutual and it was a great decision. We build our dream house in 2007 and of course it’s paid for. Retirement assets consist of they managed tax free bond account, A managed IRA stock portfolio, and a very large amount I’ve paid up whole life in which the cash value and after fit exceed 5% growth every year and I haven’t paid premiums in six years.

I didn’t have my glasses on the last sentence is death benefit grows.

Impossible to deduct because Standard Deductions is usually the best route for most people? Thanks

I'm looking to get some retirement financial planning advice. I've been doing everything by myself so far, but as retirement gets closer (7-10 years), I'd like to make sure I have everything organized well. I'm looking more for a fee-based financial planner.

Has anyone ever used a financial planning service? Like say, Fishers Investments, Edward Jones, McAdam Financial, Woodely Farra, etc?

Any help would be appreciated. Thanks.

I was a Financial Advisor with Edward Jones for six years. They are phenomenal. It's the only place I can wholeheartedly recommend if you're looking for professional help. Despite me being capable of managing my own money, I still use them. Just make sure you talk with a couple advisors to make sure you're comfortable with them!

https://www.bogleheads.org/

Information and a helpful group of knowledgeable investment types. It’s like the Pinside of all things financial.

Hopefully you’ll find that you have no need to pay an advisor:
- asset under management percentages
- commissions
- high expense ratios
- 12(b)1 fees

If you’re not familiar with those even more reason to learn.

DOL Fiduciary Rule

Yes, definitely an excellent point.

The advice could be in the f.p.’s best interest and not yours. Who would think there is no law preventing that?

https://money.com/fiduciary-rule-delayed-donald-trump/?amp=true

This is a common argument. It's like saying "there's no need to pay a mechanic, doctor, or plumber. Just do it yourself."

As I've told many people in the past: You can amputate your finger. No, really, you can. You can learn to do it yourself. It might come out messy, but you might also learn a ton and do it properly without complication the first time. Or, you can pay a professional. I have no problem with you choosing either. Just educate yourself about BOTH choices and THEN choose. Price is only an issue in the absence of value. If you don't understand the value of good money management, the high expense ratio (price) will always seem too high.

Yup

I would add that these professions, like all, have experts and hacks and everything in between. The best generally cost more, but they are worth it. Never assume they know what they are doing, educate yourself enough to make sure you are truly getting what you paid for. I find this is especially true with financial advisors and attorneys.

It's been a while since I checked this thread. How have everyone's retirement accounts been doing since the COVID crash? My retirement account is up a HUGE amount since the crash. It is a lot of fun to see the snowball keep growing and compounding. If interest rates remain low, there is no alternative to the stock market to beat inflation.

I guess there is always crypto though. haha

USAA kicked me over to Schwab on May 22nd 2020. Since then, I am up almost exactly 95% in my IRAs. My 401k is also up about 80% in the same timeframe, but I've been pouring alot of money into that one.

Impossible.

Some orange doofus was claiming the stock market would crash if he couldn't keep his job for another 4 years.

Retirement accounts, brokerage accounts, and vacation rentals are killing it. If we weren’t starting our 3rd round of IVF, I’d be trying to decide between Godzilla, CCR, or Ultraman right now…

Fuck infertility