Rising income

El Ingeniero

Level 2 Member
So, my wife's stellar performance keeps getting her steady raises at work, about 30% over the last 2.5 years.

My employer seems to understand that they pay near the bottom of the industry range, so I believe I am due for a decent pay increase (although the sons of bitches are going to screw us switching from bimonthly current payment to biweekly payment in arrears, which means my monthly income will be lower 10 out of 12 months, and I will have less pay year to date through the end of 2015).

We're both thinking of jumping to other, better paying jobs.

However, we're already making enough that some of what we can put into our traditional IRAs is not exempt.

I've been increasing the amounts we put into our 401K at our jobs, and this year I started maximizing the contribution to my health savings account (and not tapping it for regular healthcare expenses).

As far as I can tell, we're in that place where the extra taxes we pay means we don't really have more money in our pockets, and increasing contributions into tax deferred accounts isn't helping cash flow.

Are there any strategies we can pursue to pay less in the way of taxes and keep more $$$ in our pockets?
 
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Matt

Administrator
Staff member
There aren't too many options for you, outside of ensuring you are taking all of your deductions.

Most (not all) deductions are related to deferment of tax and cash flow, so if you want to pay less out in tax, you need to funnel CF somewhere to reduce your taxable base. An example of this is the 401(k) an example where it doesn't directly correlate to CF is having a baby, and therefore having an exemption for them, that isn't tied to a cash amount (though there clearly is one there). With the baby, you don't deduct diapers, but you get your $3,950 exemption.

I think the one question might be why are you funding an IRA when you haven't fully funded the 401(k)? That's how it reads in any case... for your salary level you may find a sweetspot where you can deduct the full amount of the 401(k) so focus money there for now, then roll it out to an IRA when you move on.
 

El Ingeniero

Level 2 Member
There aren't too many options for you, outside of ensuring you are taking all of your deductions.

Most (not all) deductions are related to deferment of tax and cash flow, so if you want to pay less out in tax, you need to funnel CF somewhere to reduce your taxable base. An example of this is the 401(k) an example where it doesn't directly correlate to CF is having a baby, and therefore having an exemption for them, that isn't tied to a cash amount (though there clearly is one there). With the baby, you don't deduct diapers, but you get your $3,950 exemption.

I think the one question might be why are you funding an IRA when you haven't fully funded the 401(k)? That's how it reads in any case... for your salary level you may find a sweetspot where you can deduct the full amount of the 401(k) so focus money there for now, then roll it out to an IRA when you move on.
IRA allows further diversification.

There are only 7 viable choices in my 401K plan: large cap index, small-mid cap index fund, developed market index fund, target date fund, bond index fund, and an active bond fund (PTTRX). All the index funds are Vanguard, so I'm happy about that.

The active equity choices might be well managed, but basically what they are doing is having 4 different money management groups handling the investments directly rather than offering a decent mutual fund. I have no clue about who the managers are or their track records, I know nothing about holdings except a list of the top 10, I have no access to daily returns data. In short, I have nothing I could use to get a handle on exactly what my exposure is. The claimed returns for the last 5 years are slightly better than market, but it's a bull market ...

I have the IRA mostly invested in DBC and IEMG. They've drug down my portfolio somewhat, but they haven't been well correlated with other equities or bond markets, so if my other holdings tank, the hope is that they can somewhat compensate.
 

Matt

Administrator
Staff member
Income tax deduction at your bracket > diversification. You can have a very well diversified portfolio with no more than 4 funds.

You aren't locked into the 401(k) for life, but each year you miss out on an deduction you lock in a loss, better to take an inferior plan and boost it with a 30% tax benefit, then roll it over to an IRA for the nuances.

It's like a wood carving, getting a deduction is like chopping the tree down, the getting the 'perfect, low cost funds' is like sanding the wood.

Based on what you have told me.. terms and conditions apply, may cause headaches, don't operate heavy machinery etc.
 

El Ingeniero

Level 2 Member
Income tax deduction at your bracket > diversification. You can have a very well diversified portfolio with no more than 4 funds.

You aren't locked into the 401(k) for life, but each year you miss out on an deduction you lock in a loss, better to take an inferior plan and boost it with a 30% tax benefit, then roll it over to an IRA for the nuances.

It's like a wood carving, getting a deduction is like chopping the tree down, the getting the 'perfect, low cost funds' is like sanding the wood.

Based on what you have told me.. terms and conditions apply, may cause headaches, don't operate heavy machinery etc.
I did boost my wife's 401K savings rate to 12% from 6%. Her company matches 6%. 6% of my wifes income is going to a Roth IRA (I kinda robbed the cradle when I married her, so she will be working 15 years longer than I will be).

I'm at 20%, my company matches 4%. I am also paying on a 401K loan I took out for a down payment on our house that works out to another 5%. I want to max out my HSA contribution before I put any more into my 401K.
 

Matt

Administrator
Staff member
Hsa is a good idea- I just don't like hearing your are adding to a non deductible IRA when you have 401k options.

The Roth vs Traditional thing is an ongoing battle, but I might argue in favor of traditional for her ( or any tax deferred) if you are thinking to retire before she does- married filing joint salary reduces, tax brackets drop, partial rollovers each year to shift it out of taxable and into tax free...

Just a thought- can't give a proper tailored answer based on the details here, but something to think about.
 

El Ingeniero

Level 2 Member
Hsa is a good idea- I just don't like hearing your are adding to a non deductible IRA when you have 401k options.

The Roth vs Traditional thing is an ongoing battle, but I might argue in favor of traditional for her ( or any tax deferred) if you are thinking to retire before she does- married filing joint salary reduces, tax brackets drop, partial rollovers each year to shift it out of taxable and into tax free...

Just a thought- can't give a proper tailored answer based on the details here, but something to think about.
At the beginning of November, I sit down and estimate what I'll be sending in; if I need to, I increase my contributions so that I won't have to pay out of pocket for taxes.
Last December, I think my take home was like 1/3rd of normal for the rest of the year. Wasn't too painful, we have a good sized emergency fund (6 months of expenses) that was back to normal in 2 months.

Then I contribute the maximum deductible amount to my IRA. If I have to, I also recharacterize some of my wife's most recent Roth contributions to max out what we can deduct from her Traditional IRA.

That works out OK: what I had to send in for Federal taxes, we got back as a state tax refund. :)

Not sure income will drop in retirement. According to the better retirement calculators (the ones that use Monte Carlo simulation), I have a good chance of retiring on double my salary. Part of it is that I have a good chance to inherit around 7 or 8 times my current annual salary.
 

Sesq

Level 2 Member
As far as I can tell, we're in that place where the extra taxes we pay means we don't really have more money in our pockets, and increasing contributions into tax deferred accounts isn't helping cash flow.

Are there any strategies we can pursue to pay less in the way of taxes and keep more $$$ in our pockets?
Take a longer view of cashflow and if you wind up with non-deductible IRA's fund Roth's instead. Roth doesn't help the immediate cashflow but does help your retirement cashflow. Although, with a rising income you should try to keep expenses the same, in which case your current cashflow shouldn't be that important.
 

El Ingeniero

Level 2 Member
Take a longer view of cashflow and if you wind up with non-deductible IRA's fund Roth's instead. Roth doesn't help the immediate cashflow but does help your retirement cashflow. Although, with a rising income you should try to keep expenses the same, in which case your current cashflow shouldn't be that important.
Working on that. We are a one car household, and my wife wants her own car. Dunno how to deal with that, it's going to cost at least $200/month, not counting the initial hit to the checking account.
 
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