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It’s possible to pay $150 in taxes on an income of $150K
101–107 of 107 posts
Re: It’s possible to pay $150 in taxes on an income of $150K
#102The two biggest reducers he cites are 401k contributions and tax-loss harvesting. #1. 401k. While this is a great idea, if he's trying to retire at 33, putting 17.5k away from his 70k paycheck is not going to help because he can't touch it until he is 59.5 (w/o penalty). #2. Capital losses Tax-loss harvesting means selling securities that are underwater to get a capital-loss deduction. I don't know where to start exp…
That’s not what tax loss harvesting is.
Say you own VTI, a total US market etf. Then the stock market drops 20% next week.
You can sell VTI and with the proceeds immediately buy VOO (s&p500 etf) within seconds.
VOO and VTI are insanely correlated, so you’ve basically triggered a 20% loss for tax purposes, without actually selling any of your exposure.
That said, it’s not as big of a value as you might think, since you’ve also stepped down your basis, and need to pay more capital gains taxes when you sell since you “bought” at a lower price now.
Generally accepted wisdom is to TLH up to the yearly loss deduction amount (like 3k or so) and stop.
Re: It’s possible to pay $150 in taxes on an income of $150K
#103The author has 3 children, and that's a _household_ income of $150000. 150 grand is not a huge family income to support 2 adults and 3 kids; as a country, we give people tax breaks to encourage having children and to help support people who make that choice. Calling this "Houdini-like" (author's words) tax hacking seems like a bit of a misunderstanding of deliberate social policy!
What? You expect a near-complete tax breaks on a $150k family income? That's not a small amount of money.
I wish kids were deductible in the UK. We get a tax free allowance on the first £25k (combined earnings) and that's clawed back over £100k.
Re: It’s possible to pay $150 in taxes on an income of $150K
#104Earlier quoted context omitted.
Ah. Good point. It is not a penalty, it is just the tax all at once that you would normally pay over the life of the distribution. Unless that tax isn't capital gains and pushes you into a higher tax bracket, as opposed to a lower tax bracket if you had withdrawn over time in smaller quantities. I don't know if IRA dispursions are taxed as capital gains or income tax.
>it is just the tax all at once that you would normally pay over the life of the distribution. It's not. You don't have to rollover the ENTIRE account. You can choose to only rollover a certain amount of money. The idea is say, you calculate that as a person you spend, say, $60k a year. So 5 years ago, you convert $80k of your 401k into a Roth IRA. It becomes ~$60k after being taxed. Your tax bracket is just the one…
So you are paying lump-sum taxes on X amount to store it in a Roth IRA for 5 years so that you get five years of tax-free growth in the Roth.
Re: It’s possible to pay $150 in taxes on an income of $150K
#105Earlier quoted context omitted.
>it is just the tax all at once that you would normally pay over the life of the distribution. It's not. You don't have to rollover the ENTIRE account. You can choose to only rollover a certain amount of money. The idea is say, you calculate that as a person you spend, say, $60k a year. So 5 years ago, you convert $80k of your 401k into a Roth IRA. It becomes ~$60k after being taxed. Your tax bracket is just the one…
So you are paying lump-sum taxes on X amount to store it in a Roth IRA for 5 years so that you get five years of tax-free growth in the Roth.
No, you're doing it because you can withdraw contributions from a Roth IRA with no penalty. The Roth IRA merely exists as a vehicle to get money out of a 401k with no penalty.
In this situation, there is no difference from if you were actually retirement age and withdrawing from your 401k. Same taxes, no penalty.
Re: It’s possible to pay $150 in taxes on an income of $150K
#106Earlier quoted context omitted.
So you are paying lump-sum taxes on X amount to store it in a Roth IRA for 5 years so that you get five years of tax-free growth in the Roth.
No, you're doing it because you can withdraw contributions from a Roth IRA with no penalty. The Roth IRA merely exists as a vehicle to get money out of a 401k with no penalty. In this situation, there is no difference from if you were actually retirement age and withdrawing from your 401k. Same taxes, no penalty.
The light just went on. Got it. Thanks for the explaining.
Re: It’s possible to pay $150 in taxes on an income of $150K
#107Earlier quoted context omitted.
So you are paying lump-sum taxes on X amount to store it in a Roth IRA for 5 years so that you get five years of tax-free growth in the Roth.
No, you're doing it because you can withdraw contributions from a Roth IRA with no penalty. The Roth IRA merely exists as a vehicle to get money out of a 401k with no penalty. In this situation, there is no difference from if you were actually retirement age and withdrawing from your 401k. Same taxes, no penalty.
Hey just wanted to say thanks for explaining that. I had a talk with my RIA and he never suggested it because my position for the past decade of working with him has consistently been that I would be working past IRA penalty age so it wasn't an issue. But we are considering it for other reasons now that I know it exists (e.g., early retirement).