How to Claim the Saver’s Credit / You can get a tax deduction and a credit if you save for retirement in a 401(k) or IRA.

Emily Brandon for US News World Report writes: The saver’s credit can be worth as much as $1,000 for individuals and $2,000 for couples who save in 401(k)s and individual retirement accounts. And this tax credit can be claimed in addition to the tax deduction for traditional retirement account contributions. Here’s how to take advantage of this tax credit for retirement savers.

Save in a 401(k) or IRA. The saver’s credit can be claimed on up to $2,000 for individuals and $4,000 for couples for funds contributed to IRAs, 401(k) plans and similar workplace retirement accounts. But awareness of this valuable tax credit remains low, with just 28 percent of Americans saying they know about the saver’s credit, according to a survey of 4,143 workers by Harris Poll for the Transamerica Center for Retirement Studies.

Meet the income requirements. The saver’s credit is meant to help low- and middle-income workerssave for retirement. The income limits for 2014 are $30,000 for individuals, $45,000 for heads of household and $60,000 for couples. These income limits are adjusted annually to keep up with inflation and will increase to $30,500 for individuals, $45,750 for heads of household and $61,000 for couples in 2015.

Watch out for other restrictions. The saver’s credit cannot be claimed by people under age 18, full-time students or those who are claimed as a dependent on someone else’s tax return. Distributions from retirement accounts can also reduce the credit amount.

Calculate your credit. The amount of the credit ranges from 10 percent to 50 percent of the amount contributed to a retirement account up to $2,000 ($4,000 for couples), depending on your income. “The less income you have, the more of the credit you get,” says Robert Reed, a certified financial planner for Partnership Financial in Columbus, Ohio. “It’s specifically targeting middle-income working folks.” To get a 50 percent credit in 2014, retirement savers need to earn $18,000 or less ($36,000 or less for couples). Those earning between $18,001 and $19,500 ($36,001 to $39,000 for couples) get a 20 percent credit. And savers earning between $19,501 and $30,000 ($39,001 and $60,000 for couples) get a 10 percent credit. So a couple earning $30,000 who puts $1,000 in an IRA could earn a $500 credit, in addition to the tax deduction for the same contribution. A couple earning $58,000 who saves the same amount in an IRA would get a $100 credit. [snip]  The article continues @ US News World Report,  Click here to continue reading....

The Tax Advantages of 529 Plans / Know the ins and outs of 529 plan tax benefits, which differ depending on your state.

Kate Stalter for US News World Report writes: Since 529 college savings plans were introduced in 1996, a growing number of parents and grandparents have taken advantage of the opportunity to salt away money for college and enjoy tax-free distributions.

As of mid-2014, the amount invested in 529 plans totaled $244 billion, according to the College Savings Plans Network, a consortium of state-plan operators. Compare that with the end of 1999, when investments in 529 plans totaled $5.75 billion. The group says a key factor in that growth is an increasing number of families participating in college savings programs.

A 529 plan allows an investor to contribute after-tax dollars earmarked for qualified higher-education expenses, including tuition and fees, books, room and board, and even computers and other supplies. Distributions for qualified higher-education expenses are free of federal income tax. On a state level, tax treatments differ. That’s one of the reasons 529 plan investors should understand available tax strategies, accountants and plan advisors say.

Tom Corley, a certified public accountant in Rahway, New Jersey, and author of “Rich Habits: The Daily Success Habits of Wealthy Individuals,” says making the decision to save regularly is the first step, even before you investigate potential tax benefits.

“You want to get into the habit of contributing to your child's college education plan right out of the gate,” he says. He notes that many plans allow participants to invest as little as $25 per month, as long as they are making regular contributions.

When opening a 529 plan, it’s crucial to understand what kind of tax benefit, if any, your home state offers. Most states, as well as the District of Columbia, offer residents some kind of income-tax deduction for contributions to their 529 plan. In the seven states with no income tax, there’s no possibility of such a deduction. In addition, several states that collect income taxes offer no deduction for residents’ 529 plan contributions. [snip].  The article continues @ US News World Report, click here to continue reading....

How to increase tax efficiency in my investment portfolio

Over at Bogleheads we came across the following discussion:

How to increase tax efficiency in my investment portfolio

by PrajnaSun » Sat Dec 20, 2014 9:26 am

Hello everyone,

Thank you everyone for making this forum possible. Over the last few years, I have read the forum/this website and tried to follow some advice. However, I am at a point that I begin to wonder whether I would need some assurance on my DIY approach and/or see a fee only financial advisor. This is a review of my portfolio. I appreciate any advice/perspective that you may have. Happy holidays!

Emergency funds: Yes

Debt: None (Paid off mortgage a few years ago)

I do have life insurance, disability insurance, and wills already

Tax Filing Status: Married Filing Jointly

Tax Rate: 33% Federal, 7% State

State of Residence: Indiana

Age: 42/Spouse 33 (Stay at home mom at this time)

Desired Asset allocation: 65% stocks / 35% bonds

Desired International allocation: 20% of stocks

Size of your current total portfolio: About 600K (Not including the house or our two kids’ 529 plans)

Current retirement assets

Taxable

3.9% Cash/Vanguard Prime Money Market Fund (VMMXX) (ER 0.16)

1.6% Vanguard Long-Term Tax-Exempt Fund Investor Shares (VWLTX) (ER 0.20)

8.1% Vanguard Limited-Term Tax-Exempt Fund Admiral Shares (VMLUX) (ER 0.12)

4.9% Vanguard FTSE Developed MKTS ETF (VEA) (ER 0.09)

2.4% Vanguard Total Stock Market ETF (VTI) (ER 0.05)

His Roth IRA at Vanguard (Converted immediately to Roth from IRA yearly)

5.8% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)) (ER 0.05)

6.2% Vanguard Value Index Fund Admiral Shares (VVIAX) (ER 0.09)

His Roth 401k at TD Ameritrade (No company match)

22.7% Vanguard Target Retirement 2035 Investor Shares (VTTHX) (ER 0.18)

0.4% Vanguard Total Bond Market ETF (BND) (ER 0.08)

His Profit Sharing/401K at TD Ameritrade (No company match)

12.4% Vanguard Target Retirement 2035 Investor Shares (VTTHX) (ER 0.18)

16.2% Vanguard Total Bond Market ETF (BND) (ER 0.08)

1.2% Vanguard REIT ETF (VNQ) (ER 0.10)

2.2% Vanguard Total Stock Market Index Fund ETF Shares (ER 0.05)

His HSA (Used as a “stealth IRA") at TD Ameritrade

0.8% Cash

0.6% Vanguard FTSE All-World ex-US ETF (VEU) (ER 0.15)

1.3% Vanguard Total Bond Market ETF (BND) (ER 0.08)

2.4% Vanguard Total Stock Market Index Fund ETF Shares (VTI) (ER 0.05)

His 403b at TIAA-CREFF

1.7% Traditional TIAA Guaranteed 3% (Not sure what the ER is)

Her Roth IRA at Vanguard (Converted immediately to Roth from IRA yearly)

5.2% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.05)

Contributions

New annual Contributions

$ 18,000 His Roth 401k (No employer match)

$ 17,000 His Profit Sharing/401K (No employer match)

$ 5,500 His IRA/Roth IRA

$ 5,500 Her IRA/Roth IRA

$ 6,650 HSA (to be invested in Vanguard funds via TD Ameritrade, again I use this as a “stealth” IRA)

$ 80,000 to 100,000 Taxable (for retirement, not short term goals)

Available funds

Most Vanguard Funds. However, if I use ETF in my Roth 401K or 401K at TD Ameritrade, I use only the commission free ETF. Vanguard Total International Bond ETF (BNDX) is not on that list.

Questions:

1. My company has a age-based retirement structure favored older employees, hence at my age I can’t put in a total of $50K as mentioned in some prior posts. I have consistently maximized the investment in tax shelter space available at work and IRA (then convert immediately to Roth IRA for both spouses). My only option is to do taxable investment, what should I do? It seems a bit counter-intuitive to put stock funds/ETFs in the taxable space as it would increase my taxable income. Yes, I did transfer ETF gained shares to charities (based on first in and first out only) and plan to follow tax loss harvesting in a down year.

2. Is buying an investment property or a vacation house in a different state (also to rent it out through Airbnb or VRBO websites) a good idea for diversification purpose in our situation?

3. I have put $10,000 for my two children (Age 2 and 4) since birth (Vanguard Fund 75 stocks/25 bonds). Should I put more than 10K?

4. Is there a difference between VEU and VEA?

5. What else can I do to maximize tax efficiency? Is my assess allocation reasonable? I am not sure if I should put more Tax-exempt bond funds or Total Stock Market index funds in the taxable space.

6. When I scan my portfolio in VG website, they mentioned this year that I should get some foreign bond exposure, where should I put this?

7. With the price of oil dropping so much, I am tempted to invest in a Vanguard Energy ETF (VDE) in taxable space. Good/bad idea? It would seem to go against Bogleheads’ principles of not to do market timing and not to favor one sector heavily.

8. With the 3% guaranteed at TIAA-CREFF, should I just leave the fund there or should I transfer to VG, pay tax now, and convert that to Roth?

Last edited by PrajnaSun on Sun Dec 21, 2014 2:40 pm, edited 6 times in total.

PrajnaSun

Posts: 2

Joined: Fri Dec 19, 2014 10:38 am

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Re: How to increase tax infficiency in my investment portfol

by Laura » Sat Dec 20, 2014 12:08 pm

Why are you using a roth 401k at your high tax rate? The first thing to do would be to switch that to traditional and save yourself a significant amount of tax right off the bat. You could move the tiny TIAA account and convert it. I would be tempted to do that because it is becoming an increasingly small portion of your total and a return of 3% on only 1.7% of your money just isn't worth the hassle in my book.

I also notice that you are blending target retirement type funds and then other funds, probably in an effort to hit your target asset allocation. Given your large and growing taxable account I believe it is time to give up Target Retirement funds. You also seem to just be adding funds rather than restructuring to keep this streamlined. You now have a large number of funds representing less than 5% of your total portfolio which just adds complexity and not much else. You should consider moving to something like this:

taxable

20.9% Vanguard Total Stock Market

his roth (includes TIAA rollover)

13.7% Total Intl Stock Market

his roth 401k/traditional 401k

20.1% Total Stock Market (this will be moved slowly into Total Bond Market)

3% Total Bond Market

his profit sharing 401k

32% Total Bond Market

his HSA

5.1% Total Stock Market

0% Total Intl Stock Market

her roth

5.2% Total Stock Market

0% Total Intl Stock Market

New Contributions

taxable

$90k Total Stock Market

his roth

$5.5k Total Intl Stock Market

his roth 401k/traditional 401k

$18k Total Bond Market

$15k transfer from Total Stock Market to Total Bond Market

his profit sharing 401k

$17k Total Bond Market

his HSA

$6.65 Total Intl Stock Market

her roth

$5.5k Total Intl Stock Market

This move probably isn't completely possible because you will have a taxable event to change some of those taxable holdings. However, this is an example of what you can work toward. You really don't need nearly as many tiny holdings as you currently have. By blending everything across your entire portfolio you can have a low cost, tax efficient, broadly diversified portfolio that is much less complex.

Laura

Laura

Posts: 7549

Joined: Mon Feb 19, 2007 7:40 pm

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Re: How to increase tax infficiency in my investment portfol

by duke33 » Sat Dec 20, 2014 12:53 pm

I agree with him simplifying his accounts, but a few things to keep in mind in your taxable account.

First of all; What is your income? What state?

1. If income is high (>300K) should consider Tax Muni Bond Exposure in taxable.

2. Advantageous for you to have International Exposure in Taxable account for tax credits

3. Beneficial to have 4-5 funds in taxable to be able to tax-loss harvest from losers

duke33

Posts: 28

Joined: Sun Feb 09, 2014 9:46 am

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Re: How to increase tax infficiency in my investment portfol

by PrajnaSun » Sun Dec 21, 2014 10:07 am

Thank you for your prompt response and suggestions, Laura. Please allow me to clarify.

"Why are you using a roth 401k at your high tax rate? The first thing to do would be to switch that to traditional and save yourself a significant amount of tax right off the bat"

--> When I started my job, that was the only two options presented to me. Roth 401K and Profit Sharing/401K. Let me ask them to see if I can choose to do the 401K instead. I didn't know that was an option.

"You could move the tiny TIAA account and convert it. I would be tempted to do that because it is becoming an increasingly small portion of your total and a return of 3% on only 1.7% of your money just isn't worth the hassle in my book."

--> Thank you. I will do that.

his roth 401k/traditional 401k[/u]

$18k Total Bond Market

$15k transfer from Total Stock Market to Total Bond Market"

--> Could you clarify this? Where is "$15k transfer from Total Stock Market to Total Bond Market" come from?

P

Last edited by PrajnaSun on Sun Dec 21, 2014 2:41 pm, edited 1 time in total.

PrajnaSun

Posts: 2

Joined: Fri Dec 19, 2014 10:38 am

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Re: How to increase tax efficiency in my investment portfoli

by Laura » Sun Dec 21, 2014 1:02 pm

The recommended transfer is the way to maintain your target asset allocation. The new contributions basically add to much money into stocks which are best held in your taxable account. Bonds throw off taxable dividend income so they are best placed in retirement accounts. You need $15k more in your bonds than the new contributions have so you fix this by transferring money from stocks to bonds in retirement accounts.

Laura

The Biggest Tax Changes for 2015

Sean Williams for Motley Fool writes:The upcoming change of the calendar from 2014 to 2015 brings a number of critical tax changes that consumers need to be aware of if they wish to maximize their income and minimize the amount of taxes they pay.

Since 2001, Congress has enacted more than 5,000 tax code changes, and this doesn't even include the inflation-adjusted changes that the Internal Revenue Service implements each year. That's a mountain of changes for a tax code that now has close to 4 million words. Keeping up with the biggest tax changes each year can be something of a chore, especially if you eschew do-it-yourself tax software and tax professionals in favor of handling your own taxes.

With that in mind, today we'll take a look at a few of the biggest tax changes for 2015 and examine how they might affect you.

IRA rollover limitsThere's no tax change with more significance, in my opinion, than the modifications being made to individual retirement account rollovers in 2015.

As it stands now, and through the remaining days of 2014, you can roll over a tax-advantaged IRA such as a SIMPLE IRA, SEP IRA, or traditional or Roth IRA, hold that money for up to 60 days, and then redeposit it into a new IRA without paying any taxes or penalties. However, beginning in 2015, one of biggest tax changes investors will see is the government limiting taxpayers to one IRA rollover per year. All of the aforementioned IRAs count as a single plan. Thus, if you have both a traditional IRA and a Roth IRA and want to roll them both over into a different IRA, you would have to choose between one or the other, otherwise you'd wind up paying a potentially hefty penalty.

According to the IRS, the penalty for rolling over more than one IRA in 2015 would be the account holder's ordinary income tax rate on the proceeds, a 10% penalty if it was an early withdrawal (before age 59-1/2), and a potential 6% excise tax if the rollover amount exceeds their annual allowable IRA contribution limit. In other words, if you're planning to make multiple IRA rollover moves, you'll want to get the ball rolling before 2015 hits.

FSA rollover changesWith the cost of healthcare on the rise, some consumers have turned to tax-advantaged health spending accounts offered through their employers that allow them to add pretax income to help cover their medical expenses.

The two types of accounts in question are a Flexible Spending Account, or FSA, and a Health Saving Account, or HSA. FSAs have a maximum annual contribution limit of $2,550 as of 2015. Prior to 2013, the unused balance was not allowed to be rolled over into subsequent years (until a Congressional change in 2013 that allowed up to $500 to be rolled over into 2014). In short, you had a "use it or lose it" clause with an FSA.

An HSA, on the other hand, will have a maximum contribution limit of $3,350 per year as of 2015, and you can roll over the unused funds into subsequent years. Furthermore, HSAs occasionally get money added to them by your employer in a similar fashion that your employer would add to your 401(k). Because of this flexibility, HSAs are often preferred over FSAs.

What's worth noting in 2015 is a big tax change stating that if consumers roll over the maximum of $500 from 2014 into 2015 in their FSA, they'll be completely barred from participating in an HSA in 2015. Although Congress' intent was to ensure that not all FSA money was lost if it wasn't used, giving up the ability to use a more flexible HSA may not be a good choice. Each situation will be different, but your best bet might be losing whatever is leftover in your FSA so you have the opportunity to participate in a more flexible HSA in 2015.

Tax extenders go awayFinally, even though it seems like we have this discussion every December, 55 different tax extenders that Congress agreed to pass retroactively for 2014 this past week are set to expire on Dec. 31, 2014.

Altogether, these tax breaks are worth $41.6 billion, with 20% of the breaks targeted at individuals. The two biggest tax deductions that consumers may have to say farewell to in 2015 are debt forgiveness related to short-sales and state and local sales tax write-offs.

Individuals who were underwater on their home and who negotiated a short-sale with their lender would normally have to pay taxes on the difference between the negotiated sale price of their home and their remaining mortgage. One current tax break allows that debt to be forgiven, meaning short-sellers aren't paying what could amount to a huge tax bill.

For individuals who live in a state that has no income tax, such as Washington or Nevada, residents have the option of writing off a portion of their sales tax paid as an itemized deduction. If the tax extenders go away, this deduction will as well.

Businesses, on the other hand, could stand to lose hefty research credits, credits for hiring disadvantaged workers, and a bevy of alternative-energy credits for going green. Between falling fossil-fuel prices and a cloud of uncertainty surrounding tax extenders in 2015, it could be a rough year for alternative-energy companies. 

It's possible these tax extenders could be reinstated again next year, but at the moment we have to run with the assumption that they won't be. 

Now that you have a better understanding of the biggest tax changes in 2015, you're prepared to enter the new year with income maximization and tax liability reduction in mind.

Here's how to lessen the tax hit on Roth IRA conversions

Jon Stein, founder and CEO of Betterment for CNBC writes: The lure of the Roth individual retirement account is simple: You pay taxes on your contributions, and then your money grows tax-free.

Roth IRAs are particularly appealing to high earners, who may expect to be in an even higher tax bracket during retirement.

The Roth's downside? You can't contribute to a Roth IRA if your income is too high (more than $131,000 if you're single or $193,000 if you're married filing jointly for 2015).

When the Internal Revenue Service removed the income limit on Roth conversions in 2010, the value converted increased by more than 800 percent to $64.8 billion, a report from the IRS found in January 2014. It was the first time conversions exceeded contributions. And the bulk of the conversions—57 percent—was from people with six-figure incomes.

But there's a caveat: When you convert from a tax-deferred account to a Roth, you will owe taxes on that money.

So, how do you minimize the tax hit?

"The so-called backdoor Roth is one way to avoid a big tax bill when you're over the income limit for a Roth."

There are two strategies that would enable you to take advantage of a Roth without getting hit with a super-high tax bill. The first is what's known as a backdoor Roth conversion.

The second is to plan ahead and take advantage of upcoming life or career changes that put you into a lower tax bracket temporarily.

Here's how to get your Roth without suffering the tax consequences.

The backdoor Roth

The so-called backdoor Roth is one way to avoid a big tax bill when you're over the income limit for a Roth.

If you're also covered by an employer retirement plan, such as a 401(k), you wouldn't be able to fund a deductible IRA, because of IRS rules. But you could contribute to a nondeductible IRA and then convert right away to a Roth.

When you contribute to a nondeductible IRA, you're in effect depositing after-tax dollars, so you'd only owe tax on the earnings. If you do the Roth conversion shortly after the nondeductible contribution, the tax due to conversion will likely be nominal.

This method is most beneficial tax-wise if you don't have other deductible IRAs. However, there is an important caveat here: If you do have IRAs that you deducted contributions for or that you rolled out of old 401(k) plans, the taxable portion of any conversion you make is prorated across all your IRAs.

As you can see in this Roth conversion example, if you have $15,000 in traditional IRAs for which you've received a deduction and you want to deposit $5,000 into a nondeductible IRA and convert it to a Roth, you would divide $5,000 by $20,000 (the total value of all IRAs) to get the portion of the $5,000 you can convert tax-free, which is 25 percent, or $1,250. So you would owe tax on the other $3,750, based on your current tax bracket.

The life-event advantage

Another way to minimize taxes is to plan ahead, if you can, when you know that a career or life change is coming that will push you into a lower tax bracket. Then, when you convert from a 401(k) or traditional IRA to a Roth, the tax you'd owe would be based on that lower bracket.

For example:

• Going to graduate school.
• Making a career change that lands you in a lower-paying (but perhaps more rewarding) line of work.
• A planned or unplanned period of unemployment.
• Starting your own business.

In each case, you can and should continue to save in tax-deferred accounts prior to making the conversion. Then, when the life transition is under way, you can strategically convert based on your new tax bracket.

For example, if you're planning to attend graduate school, your income could drop from the 28 percent tax bracket to the 15 percent tax bracket.

In that case, imagine that you'd like to seize the moment and convert a $100,000 IRA to a Roth. If you did the conversion while you were in the 28 percent tax bracket, you could owe about $17,250 in federal and state tax (using New York state as an example).

But if you waited until you were enrolled in school, living on a teaching stipend and squarely in the 15 percent tax bracket, you could convert the IRA to a Roth and pay $9,750—about $7,500 less.

Bear in mind that the amount you convert is considered income, so you want to make sure that amount doesn't bump you back up to a higher tax bracket. Again, this example is only an illustration; individual specifics could change the numbers.

The greater point is that converting to a Roth may be highly desirable from a tax perspective down the road—so understand the Roth IRA rules, and don't let the tax bill today stand in your way.