It may be down a little on the year, but it has a decent track record going back to 2000. I will definitely have to look into this to see how I can replicate it. You can’t avoid self-employment tax (15.3%.) I’m with Vanguard and First Trade. It’s interesting how this system is possible. I’m a huge fan of Roth IRA’s. which brings down your taxable income, so that might be worth exploring for me. Roth IRA rules dictate that as long as you've owned your account for 5 years* and you're age 59½ or older, you can withdraw your money when you want to and you won't owe any federal taxes. When you do a conversion, you need to take the pre-tax 401k into account as well. Read the whole story on the About Page, See our Real Estate Crowdfunding investment, Track Your Money for Free with Personal Capital, How to Start Investing in Dividend Stocks, Disclosure: All content on this site is for informational purposes only and does not constitute professional financial advice. Yes, that’s true. Here is what I found online. How can this be possible? Nathan, I have never heard of that. They have brokerage service too. I will not make withdrawals until I retire at 40 . This is mostly geared toward the executives. Yes, I believe the process should be allowed. The $36,000 could come from any taxable sources, including part time work and IRA conversion. Part of my plan is to start a Roth IRA ladder with conversions from my employer sponsored 401k plan. It is self employment income. Whew, I hope I didn’t lose too many people. * Or are you converting an IRA where you’ve been contributing ~$5,000 pre-tax into a Roth IRA and therefore never paying taxes on the way in AND on the way out? I’m happy making just enough and not paying a lot of tax as well. Is there a piece that I’m missing? We’re planning on trying this trick ourselves, but we’re not banking our early retirement on it lasting forever! Thanks for the info from Fidelity. I'll probably end up adding something else in to my IRA. For each two dollars of AGI over $100,000, the $25,000 limit is reduced by one dollar. ACA will complicate things. I don’t see any exceptions that apply unless I get a massive inheritance tomorrow. Just buy the coverage on your own or try to get into a subsidized affordable health care exchange plans. If you convert $37,834 from traditional to Roth, you’d have +$10,000 in taxable income. I might change it to S corp if the Trump tax cut comes through. Our rental income shows up as negative due to property depreciation. Normally, you have to pay tax when you do the Roth IRA conversion. As an individual, if you make over $132,000, you also can not contribute. Generally speaking, it’s much better to do Backdoor Roth IRAs when you don’t have any other existing traditional IRAs otherwise you would have to pay hefty tax on those too. I just don’t want to pay a dime to Unc Sam unnecessarily. * If you contribute to an IRA, that means your income had to have been below a certain low income threshold in the first place ~$70,000 or something right? They are very good about answering these kind of questions. My 401k account is more diversified - foreign markets, bonds, etc. I guess you have to take all existing IRAs into account. If you are a tax expert and see a problem, please let me know. How to Buy Vanguard's Total Stock Market Index Fund (VTSAX). When you do a rollover, you have to do it in ratio. For its Roth IRA offering, Stash lets you invest with no added investment fees. I admit my situation is a little unorthodox, but it could be replicated. This me… Bogleheads are die-hard fans of Jack Bogle and index fund investing in general - Jack Bogle founded Vanguard, is the father of index funds and an all-around inspiration for people who want to engage in passive investments (generally stocks and bonds) for a long-term return that will beat active alternatives. Hmmm.. I will need to look into it. Of course, hopefully this will be far off in the future. I am finding that I know more than my tax accountant on these kind of topics, and I always like to present her with hard data/resources. I expect to have zero taxable income this year. I have always held stocks, bonds, mutual funds, etc., but I would like to look at using my IRAs for real estate. Thanks for the follow up.. Hey Joe, very interesting to read, thanks for sharing. Here’s my attempt to explain what’s going on: Taxable income: $32,000 Adjustments: $27,044 AGI: $4,956, Deductions/Exemptions: $32,790 “Taxable income” = AGI – Deductions = (-$27,834). Great tax write off too. 100% VTSAX strategy for Roth IRA investment. Yes it doesn’t apply against self employment tax. I rolled over my old 401k into a Roth IRA when I left my job. For 2020, the maximum contribution to a Roth IRA is $6,000 per year.But if you’re 50 or older, that increases to $7,000 per year. Anther option to share – There is an exception to take money out of 401k if you leave your company the year you turn 55 or older without having to pay the 10% penalty. Yes, I would stop contributing to my i401k and just use that money to fund our cost of living. Here is the history 1. . However, you can buy ETFs that are designed to move in the opposite direction as a stock market index or other benchmarks. Okay, I checked and saver’s credit does not offset self employment tax. Not sure about ACA, though. At this point, we could bring in $36,000 more and the total tax would stay the same. Do you have any backup plan if this tax loop hole gets closed? Too many people are bored by taxes, understandably so, but they’re leaving so much $ on the table by not becoming educated on them. Press question mark to learn the rest of the keyboard shortcuts, https://jlcollinsnh.com/2019/03/03/stocks-part-xxxv-investing-for-seven-generations/. A Roth IRA offers many benefits to retirement savers. In summary, John and Mary’s 2018 taxable Roth IRA … Distributions from a Roth IRA are 100% tax-free, meaning the appreciation on your Roth assets is never subject to income taxes. I just transformed tax-deferred to NO TAX without having to pay anything! This is usually call “after tax 401k contribution.” Some employer will let you do this and some won’t. Have you explored what that might mean? You have a $1,000 tax credit, making your tax liability $0. So if you have $100,000 that is tax-deferred and you add $100,000 with after-taxed money. 100% a year for four years sounds unlikely. John and Mary’s total 2020 Medicare Part B premiums are now $4,512.00 each, or $9,024.00 for both. * When you put a number in (), the meaning is negative fyi. VTSAX is one of Vanguard’s flagship funds, and it is always within their top 10 most popular investments. Roth IRA conversion* – We want to build a Roth IRA ladder so we can avoid the 10% early withdrawal penalty. I am converting my traditional IRA into a Roth IRA. I have been wondering if I could contribute to my i401k and do a Roth IRA conversion in the same year. With Roth IRAs, withdrawals are 100% tax-free after age 59½, when your child is likely to be in a higher tax bracket than they are now. We can keep doing this for 20 years and all our tax-deferred funds will be moved to our Roth IRA. It is funny how the tax code is set up in a way that encourages retirement and investing, and discourages work income. The personal deduction for married filing jointly is $24,000. The amount might not be very big, though. So your wife only pays about $3,000 a year in federal income taxes? Think about both accounts as being one and diversify/rebalance accordingly. I will get it straightened out this year. I hope to reduce my taxes as much as possible . There are a number of variables that make the particular phase-in and phase-outs highly individual. We’d have to have some earned income to get that credit. For investors seeking broader diversification, VTSAX is the better bet. We have to pay self employment tax no matter how much we make. There is another way to accomplish your goal. I just moved $36,000 from my traditional IRA to my Roth IRA. I’m pretty sure you can. These two things will help you bridge the 5 years gap in the Roth IRA ladder and you’d pay less tax as a bonus. Also, Roth is nice because you won’t have to pay tax on the earning in the future. Check with your employer if they will allow this. Just curious about the rental income depreciation. Since a majority of business income is sent to your 401K would you draw on your rental taxable accounts or some other savings to fund your actual expenses? Or don’t max out pre-tax and put all the money into your 401k post tax. But never fear high earners, there is a solution to this wonderful problem. I’m 24 and have 1,500 in pretax accounts sponsored by former employer labeled: – Employee pre-tax vesting — 100% immediate vesting – Employer vesting — 100% immediately vested, Can I roll these over to a Roth? Also, the Roth IRA is not subject to Required Minimum Distribution so you won’t be forced to withdraw from it in your lifetime. It is a sole proprietor. Everyone’s situation is different so I can’t really give good tax advice. For conversion and rollover, this exception kicks in after 5 years. Actually, I’m not exactly sure why the tax isn’t increasing. Hoping for a clear cut answer on whether this could be a sound investment strategy. The Roth IRA account minimum starts at just $.01 so there is nothing holding you back from getting started. https://personal.vanguard.com/us/SbsCalculatorController. I have thought about become self employed, and becoming a 1099 contractor in order to leverage the employer contribution to the 401k to contribute as much as possible. Thanks for the encouragement. Tax gain harvesting is another, although less powerful than free Roth conversions. The tech company stock appreciates by 100% a year for four years. You should absolutely 100% wait until the price of VTSAX is on sale to invest your money. This applies when you have tax-deferred and already taxed money in your IRA. You have earned income via your business. As a separate point, do you think this process should be allowed to be possible? I am working toward fully funding my 2019 401k and IRA. So Income ($32,000) means you have negative income. I don’t think you need to take the existing IRAs into account as long as they are in a different account. You’re right. I’d argue it’s better than what most people pay for, but I like to have a more diverse IRA. Your tax isn’t increasing because of qualified dividends I presume. I’m not quite to this point in life so I have some time yet, and who knows, tax law could be amended before I’m ready to take advantage of it in 10 years or so. I had thought that any losses from rental income could not be used to reduce your overall tax burden from your regular active income. We have too much adjustment, deduction, and exemptions. That means you need to pay tax on the amount you convert. Why don’t you call your brokerage and ask them to double check. but I think you mean you have positive $32,000 in income right? All the money in this account is pre-tax. I had called Fidelity and confirm it. It says the IRS looks at one’s total holdings regardless of where the IRAs are held. I personally allocate 60% to VTSAX and 40% to VFWAX. If you plan to invest in mutual funds, I would call Vanguard. As some comments mentioned above. Now, let’s add the Roth IRA conversion to the mix. However if you increase your roth conversions even more you will have taxable income. Normally, you have to pay tax when you do the Roth IRA conversion. If this isn’t mind blowing, I don’t know what is. Goodluck. The equity characteristics of VTSAX and VFIAX are as follows: I’m going to have to reference this post down the road. It’s a surprise to me and I’ve been filing tax for 20 years. I did and they were uncharacteristically forthcoming; tax is usually the third rail when it comes to investment advice. IF that is that case, then that is magic and not sure how this is possible. I just fix the (). This index fund comprises about 100% of the US stock market by market value. (This is a taxable event. We have to pay self-employment tax even if our taxable income is zero. I doubt your total portfolio has 40% of it's equities in international, so rebalance accordingly. We could draw down our dividend portfolio as well, but I would like to wait until we’re at least 50 to do that. It will also help you get used to living without $100 per month – a good monthly starting deposit for your Roth IRA. Thanks! The nice thing is that you were likely in a high tax bracket during your working years, but when you do your ladder you will be in a low tax bracket. See comments below. The negative comes mostly from depreciation and interest paid. We couldn’t take advantage of everything because our income would be too low. That’s pretty impressive. Take the 10% penalty? But how I’ll survive for 5 years will be primarily through my taxable brokerage account. Anyway, it’s better to defer the tax now, right? That’s after all the deduction and employee contributions, though. All the rentals are under both our names. Press J to jump to the feed. She’s 24, making a hundy a year. The reason you don’t have to pay the 10% penalty is because the penalty doesn’t apply to your contribution to the Roth IRA. Real estate might be a good idea. For taxpayers with between $100,000 and $150,000 of adjusted gross income, this shelter has been phased out. Is the rental property under just your name or a partnership with the Mrs? Just repeat this every year until your 59 ½. In the 10% tax bracket, you’d owe $1,000 in taxes. Overall, Roth IRAs are more flexible. No, this is not an S-corp. So, a 50/50 stock-bond allocation would have a max of 10% international stock. I also removed the one time Hi-Tech antitrust settlement. It’s pretty amazing to defer tax and then pay little to no tax on that amount. Yes, it’s a big loophole for early retirees. Although, if I take out my business income and rental, then I would have to pay a little tax on the conversion. Any other reasons to do this or not? You open up a custodial Roth IRA and he invests $6,000 a year in a hot tech company. I’m depending on H&R Block to get this right. So you should be able to claim the savers credit I think. With only $6,000 a year, you guys agree to invest more aggressively. * Are you converting your 401k into a Roth IRA? Disclaimer: I am not a tax accountant and there is a chance that I could be wrong about this. Tax is boring and I’m ready to stop thinking about it for another 11 months. If you plan to retire early, you should consider starting your own business and investing in rental properties. The deduction is nice if you can take advantage of it. Here is a simple one from Vanguard. Or else work part time on something I enjoy. Primarily we look to cover expenses from dividends. The Roth IRA is a tax-free account. 401k contributed max every year. 3. The tax savings may actually end up costing you more if you run the actual numbers. When you rollover the $100,000, you would have to pay tax on 50% of the amount rollover. Joe – been following along for a while but first opportunity to post. You could probably increase your conversions even more and take advantage of the savers credit at that income level to wipe out additional tax. Is there a resource that spells this out? Let me know what more information you need. If I put Mrs. RB40’s income back in and remove the conversion, we’d pay about $7,000. That’s awesome. John Bogle recommended in several books (Bogle on Mutual Funds and Commonsense Guide to Mutual Funds) and in a few interviews from 2018 maximum of 20% of your equities in international stock. Of course, I prefer to make more money and pay more tax, but life is what it is. Joe, what Fidelity told you is correct. I have my tax accountant looking into but wanted to throw it out here as there is so much wisdom on this site. ... 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