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by **Chicago60** » Tue Jul 02, 2013 10:45 pm

My company ended its profit sharing plan last year (I rolled over the funds into my IRA after years of Back Door Roths), and no longer has any retirement accounts available. If I am in or near the highest income bracket, what options, if any, do I have to set aside money in a tax advantaged account? We already fully funded I-Bonds and with a substantial IRA account, adding non deductible money to the IRA does not make sense for me for the administrative hassle once I start withdrawing.

by **Electron** » Tue Jul 02, 2013 11:52 pm

You might want to consider taxable equity investments with a focus on tax efficiency. Many index funds have low turnover and there are also tax managed funds. There are tax breaks for qualified dividends and capital gains.

Since future tax rates are not known in advance, it may make sense to hedge and use both taxable and tax-deferred accounts. The same argument applies to Traditional IRAs and whether a Roth Conversion will ultimately pay off.

Municipal bonds could be considered on the fixed income side. If you are concerned about rising rates, individual bonds can be held to maturity.

One could also evaluate tax deferred variable annuities holding mutual funds.

by **grabiner** » Wed Jul 03, 2013 12:35 am

Chicago60 wrote:My company ended its profit sharing plan last year (I rolled over the funds into my IRA after years of Back Door Roths), and no longer has any retirement accounts available. If I am in or near the highest income bracket, what options, if any, do I have to set aside money in a tax advantaged account? We already fully funded I-Bonds and with a substantial IRA account, adding non deductible money to the IRA does not make sense for me for the administrative hassle once I start withdrawing.

If neither you nor your spouse is covered by an employer plan, you can both make deductible IRA contributions regardless of your income.

If you have more to invest than that, then it is probably best to buy stock index funds in your taxable account; they are not tax-advantaged in the same sense as IRAs, but they do produce low tax bills.

by **Bob's not my name** » Wed Jul 03, 2013 5:15 am

From your prior post it looks like your spouse could continue to do backdoor Roths without the complication of an existing pre-tax IRA. However, since you are in a high bracket and eligible for deductible TIRA contributions, that looks more attractive ($13,000/year given your ages). In Illinois it's also possible to do a state-deductible back door Roth (see viewtopic.php?f=10&t=86262 ), but I don't think that's attractive in the 35% federal bracket* -- you can enjoy the Illinois exemption on retirement income later.

*It's worse than that. Under the ATRA rules the 35% bracket is pretty narrow. You are subject to the 0.9% ACA tax on wages (not avoidable), the 3.8% ACA tax on investment income, the ATRA exemption phaseout (1% per dependent), the ATRA itemized deduction phaseout (1%), and possibly the 20% ATRA rate on LTCG and QD and the 39.6% rate on other income. The deductible TIRAs allow you to avoid about $6,000 in taxes.

by **Chicago60** » Wed Jul 03, 2013 10:51 am

Thanks, Bob (though I suppose that is not your name). Already did spouse's backdoor Roth. And I had to "undo" my backdoor Roth last year. Adding an after tax contribution of $6500 (which I did in January 2012) to an IRA that now has substantial assets in before tax contributions made no sense to me as noted above due to the administrative hassle once I start mandatory withdrawals. As for the other responses, I very much appreciate the time you took to post, but the posts did not answer the question.

by **Bob's not my name** » Wed Jul 03, 2013 11:01 am

Chicago60 wrote:As for the other responses, I very much appreciate the time you took to post, but the posts did not answer the question.

This didn't?

grabiner wrote:If neither you nor your spouse is covered by an employer plan, you can both make deductible IRA contributions regardless of your income.

by **Chicago60** » Wed Jul 03, 2013 11:05 am

I stand corrected....that portion of the reply did.

by **Bob's not my name** » Wed Jul 03, 2013 11:17 am

And in my post I'm pointing out that the backdoor Roth you already did for your wife is actually deductible. For federal purposes, that gets you nothing because you pay the tax at conversion, but thanks to Illinois tax law you made an immediate 5.3% return. In your bracket I wouldn't bother to convert, but that's your choice.

by **Electron** » Wed Jul 03, 2013 2:37 pm

Bob's not my name wrote:For federal purposes, that gets you nothing because you pay the tax at conversion, but thanks to Illinois tax law you made an immediate 5.3% return.

Thanks for the excellent research on the backdoor Roth conversions for each state. The 5.3% return is a nice extra but I believe it also comes with additional tax obligation in the future.

Chicago60 - The variable annuity that I mentioned is a tax advantaged account. Expenses can be quite low. Here is one example.

https://investor.vanguard.com/what-we-o ... retirement

Lastly, it is worth thinking about RMDs after age 70.5. The withdrawal percentage rises every year, and depending on the return in the account the taxable withdrawals can increase in dollar amount for many years before declining.

The RMD percentage starts out at 3.65% and hits 5.35% at age 80. The percentage is 8.77% at age 90 and it eventually levels off at 52.63%. Those with one or more accounts subject to RMDs can wind up with significant withdrawals and taxes to be paid for many years. It is all ordinary income and may push one into a relatively high tax bracket.

by **Bob's not my name** » Wed Jul 03, 2013 2:42 pm

Electron wrote:The 5.3% return is a nice extra but I believe it also comes with additional tax obligation in the future.

How so?

by **Bob's not my name** » Wed Jul 03, 2013 2:44 pm

Electron wrote:The percentage is 8.77% at age 90.

A lot of people at that age are in assisted living, the cost of which is deductible, placing them in the 0% bracket even if they have a six figure income. I managed the finances of a wealthy elderly person who had enough headroom in the 0% bracket to convert all IRAs to Roth at that tax rate. Zero is a low rate. The Roth IRA was then inherited.

As is discussed often here, early retirement (<70 today, perhaps <75 in the near future) is also a great opportunity to convert to Roth at a low tax rate.

Retirees are generally in very low brackets.

by **Electron** » Wed Jul 03, 2013 3:23 pm

Bob's not my name wrote:

Electron wrote:The 5.3% return is a nice extra but I believe it also comes with additional tax obligation in the future.

How so?

I assumed that a deductible IRA contribution for purposes of the state tax affects the IRA basis for the state and future taxation. Maybe that is incorrect.

In California there are some interesting complications for IRAs. One has to keep track of 1982-86 basis as that is withdrawn first before any state taxes are paid on withdrawals. IRA basis may also be different for the purposes of Federal and California income taxes.

by **Bob's not my name** » Wed Jul 03, 2013 3:30 pm

No, the state taxes neither withdrawal nor conversion. If you contribute to a TIRA, convert it to a Roth IRA, and later withdraw from the Roth, Illinois taxes none of those transactions. If instead you contribute directly to a Roth IRA, you are taxed on that transaction.

by **Chicago60** » Wed Jul 03, 2013 4:53 pm

Thanks for those thoughts.

by **grabiner** » Wed Jul 03, 2013 9:25 pm

Electron wrote:

Bob's not my name wrote:

Electron wrote:The 5.3% return is a nice extra but I believe it also comes with additional tax obligation in the future.

How so?

I assumed that a deductible IRA contribution for purposes of the state tax affects the IRA basis for the state and future taxation. Maybe that is incorrect.

In California there are some interesting complications for IRAs. One has to keep track of 1982-86 basis as that is withdrawn first before any state taxes are paid on withdrawals. IRA basis may also be different for the purposes of Federal and California income taxes.

Other states also have odd rules; check with your state tax bureau. For example, NJ does not allow a deduction for IRA contributions, so all IRAs (except rollovers from deductible 401(k)s) are treated as non-deductible for NJ tax purposes. This makes Roth IRAs more attractive in NJ, particularly if you might retire in another state and thus get no benefit from the NJ basis.

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Friday, July 5, 2013

What tax advantaged accounts may I invest in, if any?

What tax advantaged accounts may I invest in, if any?

What tax advantaged accounts may I invest in, if any?

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Re: What tax advantaged accounts may I invest in, if any?

Re: What tax advantaged accounts may I invest in, if any?

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Re: What tax advantaged accounts may I invest in, if any?

Re: What tax advantaged accounts may I invest in, if any?

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