Sunday, January 19, 2014

Treatment of After-Tax 401k Contributions

Over at Bogleheads  we read the following discussion: Treatment of After-Tax 401k Contributions

Treatment of After-Tax 401k Contributionsby jcman01 » Sat Jan 18, 2014 8:39 pm

At some point during the year (although I haven't noticed it in a few years), some of my 401k deductions to Vanguard were classified as After-Tax. Does this mean that when I withdraw from my 401k, they'll be lumped in with my Pre-Tax? Isn't that double-taxation, in effect? I can understand the earnings on the After-Tax being taxable, but not the After-Tax deductions themselves.

Am I overthinking this? I have always wondered this, but as I get older, it matters more
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Joined: 12 Feb 2013

Re: Treatment of After-Tax 401k Contributionsby sesq » Sat Jan 18, 2014 9:18 pm

You have basis in your after tax contributions. So that will reduce the taxable income when you withdraw it. You may be able to withdraw the basis first (can't remember), but even if you have to spread it out you won't be double taxed.
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Re: Treatment of After-Tax 401k Contributionsby dbr » Sat Jan 18, 2014 9:22 pm

I have a 401K that went through all sorts of gyrations with the plan, the employer, the contributions, yadda, yadda - short story I also have some after tax money in the 401K.

I believe we can be quite assured that when it comes to distributions all of this gets sorted out. The record keeping is with the 401k custodian. Had the same sequence of contributions happened in an IRA you would have kept it all straight by filing a form 8806 (or something like that) with the IRS every year, but not with a 401K.

As posted above, it may be an option to withdraw only the after tax basis tax free (of course), but there would still be tax on the earnings. I'll be questioning the custodian at some point about this.
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Re: Treatment of After-Tax 401k Contributionsby livesoft » Sat Jan 18, 2014 9:25 pm

I feel that after-tax contributions to a 401(k) are a really really bad idea unless they get almost immediately converted to a Roth IRA.

The reason is that the gains on those contributions will be taxed at ordinary income tax rates when the money is withdrawn from the 401(k) instead of at the more favorable Roth rate of 0% or the more favorable long-term capital gains tax rate which could be as low as 0%.

Of course, maybe one's withdrawals from a 401(k) will not be taxed, but that requires special tax planning as well, so it is easier to not create the problem to begin with.
It's all about market timing, uh, I mean rebalancing, uh, I mean opportunistic rebalancing, uh, I mean short-term opportunistic rebalancing due to a short-term change in one's asset allocation.
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Re: Treatment of After-Tax 401k Contributionsby dbr » Sat Jan 18, 2014 9:37 pm

livesoft wrote:I feel that after-tax contributions to a 401(k) are a really really bad idea unless they get almost immediately converted to a Roth IRA.

The reason is that the gains on those contributions will be taxed at ordinary income tax rates when the money is withdrawn from the 401(k) instead of at the more favorable Roth rate of 0% or the more favorable long-term capital gains tax rate which could be as low as 0%.

Of course, maybe one's withdrawals from a 401(k) will not be taxed, but that requires special tax planning as well, so it is easier to not create the problem to begin with.


I wasn't planning on doing a Roth conversion of 1.2% of the balance in my 401K. Your point is taken for other situations. Also, yes, we terminated a 403b plan once that held about 0.5% of our wealth at the time.
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Re: Treatment of After-Tax 401k Contributionsby livesoft » Sat Jan 18, 2014 9:41 pm

But what about the OP's after-tax 401(k) contributions?
It's all about market timing, uh, I mean rebalancing, uh, I mean opportunistic rebalancing, uh, I mean short-term opportunistic rebalancing due to a short-term change in one's asset allocation.
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Joined: 1 Mar 2007

Re: Treatment of After-Tax 401k Contributionsby JW Nearly Retired » Sat Jan 18, 2014 9:47 pm

If my 401k is any guide, the after-tax contributions plus their earnings form a sub-account that will be the first money that comes out when withdrawals/RMDs are made from the 401k. That means the need to account for the after-tax component will most likely disappear in a few years.
It's not a problem.
JW
Retired Summer 2013
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Re: Treatment of After-Tax 401k Contributionsby JoMoney » Sat Jan 18, 2014 9:57 pm

The 401(k) administrator should keep track of how much "after tax" money was contributed.
If you roll the 401(k) into a traditional IRA you will have to file form 8606 with your taxes to report the amount of after-tax money in your IRA (the form is not complicated, I do it with Turbo-Tax online).
When you go to withdraw from the IRA a portion of the money will come from both pre-tax and after-tax. You will not have to pay taxes again on the portion that was already taxed (as long as you account for it properly), but you will owe taxes on any earnings from it.
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Re: Treatment of After-Tax 401k Contributionsby Sidney » Sat Jan 18, 2014 10:04 pm

or you may be able to isolate the basis and roll it to a ROTH, with the pre-tax money and all earnings going to a TIRA.
I always wanted to be a procrastinator.
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Re: Treatment of After-Tax 401k Contributionsby JW Nearly Retired » Sat Jan 18, 2014 10:06 pm

JoMoney wrote:The 401(k) administrator should keep track of how much "after tax" money was contributed.
If you roll the 401(k) into a traditional IRA you will have to file form 8606 with your taxes to report the amount of after-tax money in your IRA (the form is not complicated, I do it with Turbo-Tax online).
When you go to withdraw from the IRA a portion of the money will come from both pre-tax and after-tax. You will not have to pay taxes again on the portion that was already taxed (as long as you account for it properly), but you will owe taxes on any earnings from it.

If you leave it in the 401k the after-tax sub-account money comes out first. I think, but not certain, that if you roll it all over to an IRA then it all gets homogenized and all subsequent withdrawals will be a mix of pre-/post-taxed contribution money and earnings. You don't pay taxes again on the post-tax contributions, but the accounting is forever.

Someone please correct me if I'm wrong about this. It's one of the reasons I'm leaving my 401k money where it is.
JW
Retired Summer 2013
Posts: 3300
Joined: 16 Dec 2007

Re: Treatment of After-Tax 401k Contributionsby dbr » Sat Jan 18, 2014 10:46 pm

I did a little more reading on the web (danger, there be dragons). I think the ability to separately withdraw or roll-over after tax 401K depends on whether the contribution was pre-1987 or post-1986. Post 1986 amounts in 401Ks are distributed pro-rated with before tax contributions. Pre-1987 contributions do not have to be prorated. That means when I take a 401K withdrawal or rollover a percent or so of the withdrawal will not be taxable as my little increment is post 1986.. All of this is to be correctly reported on the 1099 from the plan custodian. I'll call them and ask sometime.

Posted on 9:27 AM | Categories:

401k Franchise Business Financing / Steps to Invest IRA funds in a franchise business

Over at Harvard Law we read:  There are essentially two methods to invest IRA funds in a franchise. While both methods are allowable under the IRS regulations, both have their own set of rules, so both should be carefully understood and analyzed before investing IRA retirement funds in a franchise business. Method one entails investing the IRA funds passively in a franchise and method two involvesactively investing IRA funds in the franchise business (whether existing or start up franchise financing) by transferring the IRA proceeds to a roll over as business startup 401k profit sharing plan (ROBS PSP 401k).
Following is the complete breakdown of both IRA franchise business financing methods
Method 1: Invest IRA funds actively in a franchise entails the following:
  • A new C-corporation is established.
  • Corporation sponsors a new 401k/PSP.
  • The IRA funds are transferred to a new brokerage account opened for the 401k/PSP.
  • The new franchise corporation issues stock shares to the 401k/PSP for the benefit of the franchisee.
  • The franchisee must be an employee of the franchise business and he or she may take a reasonable salary.
  • The franchisee’s family members may be employees of the franchise business and receive reasonable compensation for their services.
  • To the extent that the corporation generates profits and elects to distribute those profits to the owners of the business, the percentage of the profits associated with the shares held in the 401k/PSP will flow back to the 401k/PSP brokerage account.
Method 2: Invest IRA funds passively in a franchise:
When IRA funds are passively invested in a franchise business the following applies:
  • The IRA owner/participant may not personally benefit from his or her IRA’s investment in the franchise business; therefore the IRA owner may not receive a salary.
  • The IRA owner may not work for the franchise.
  • The IRA owner may not serve as a director, officer or in any position having powers or responsibilities similar to those of officers or directors.
  • The following family members of the IRA holder may not work for the franchise business:
    • The IRA owner’s spouse
    • The IRA owner’s parents
    • The IRA owner’s grandparents
    • The IRA owner’s children
  • When investing the IRA passively in a franchise business, the investment is consummated either in the name of the IRA custodian f/b/o the IRA, or a single member IRA LLC is setup (after the IRA has been transferred to a self-directed IRA custodian such as IRA Services Trust Company); the IRA LLC is then funded with self-directed IRA funds, and the IRA LLC purchases stock shares in the case of C-Corporation, or units in the case of an LLC in the franchise business.
Compliance Note 1: The S-Corporation rules restrict an IRA or any type of retirement account from owning stock shares in an S-Corporation.
  • After the IRA or IRA LLC buys stock or units in the franchise business, the franchise business issues a stock certificate in the name of the IRA, or in the name of the IRA LLC.
  • Profits resulting from the IRA’s ownership percentage in the franchise flow back to the IRA or IRA LLC.
Compliance Note 2. When an IRA or an IRA LLC invests passively in an operating business, gains in excess of $1,000 will be subject to unrelated business income tax and must file Form 990-T.
To learn more about financing your business or franchise with your retirement money, check out these pages:
Posted on 9:26 AM | Categories:

It May Be Hip To Be Square, But It Is Spindle That Could Fill Your Mobile Wallet

Mobile Guru For Seeking Alpha writes: Good ol' Huey Lewis and the News had it right back in the 80's. I bet he never imagined some 30+ years ago that today his words would find their way into the title of a Seeking Alpha article.

Indeed today, it is hip to be Square, Inc., or even better one of the San Francisco-based company's investors. $5 billion! That's how much Square is worth, calculated from the planned sale of 1 million shares at $135.28 each, sources say. The startup's stock, which isn't publicly traded, would be sold by current investors and employees of the company, which has received funding from Kleiner Perkins Caufield & Byers, Sequoia Capital and others. The company was co-founded by Twitter Chairman Jack Dorsey.

According to TechCrunch, Square's growth has been a story of sustained momentum. Rising from a payment processing run rate of $1 billion in the middle of 2011, Square is now expected to process some $30 billion this calendar year. As Square's payment processing run rate has grown, bolstering its revenue, so too has its valuation exploded. Worth only $240 million in January 2011, Square has increased its value by an average of 175% per year since then, to $5 billion today.

With many calling for 2014 to finally be the year of mobile, Square's growth comes amidst a favorable backdrop for the mobile payments space. Mobile payments are projected to reach a staggering $721 billion in 2017.
So while all good is for the various investors in Square, chances are that you, along with me, aren't one of them. Unless you have some deep Silicon Valley and/or Wall Street ties, you, too, have unfortunately failed to receive an invite to this exclusive party.

So when Square goes public in 2014, investors would be well served to have their eyes on other "sympathy stocks," or stocks that should also rise in concert. The Square tide will clearly raise many boats.

For this very reason, my top 2014 stock pick remains Spindle Inc. (OTCQB:SPDL). Spindle is a mobile commerce company that leverages its propriety platform for mobile marketing and payments to help other companies enter the mobile economy without the stress and confusion of mastering technology and trends. The company has been in the forefront of developing and distributing their technology for the past 18 months culminating with the launch of their MeNetwork 360 product at the Money2020 show in October in Las Vegas. Recently the company issued news that it had acquired Yowza!!.

Spindle announced that it will combine its MeNetwork mobile marketing services with the Yowza!! mobile couponing solution to deliver an end-to-end mobile commerce service. The new service will allow merchants to manage customized marketing campaigns in a single interface and facilitate payment processing as an integrated service. For consumers, the platform delivers a wide range of features, including loyalty programs, electronic coupons, rebates and time and geography relevant offers as well as an electronic wallet, all of which are delivered to personal iOS and Android smartphones and tablets. As a result, consumers can easily find merchants, locate appropriate offers, build loyalty points and make purchases directly from a single app on their mobile device. The combined solution already has an existing user base of nearly 2 million consumer downloads and approximately 95,000 merchant locations.

Seizing on the evolutionary, and formerly separate, disciplines of the mobile marketing and payments market, Spindle, from a 30,000-foot view, has PayPal, Braintree (both now owned by eBay (EBAY)), Foursquare, and Groupon (GRPN) features and perhaps more. Spindle is not a daily deals or a display ad, but rather a merchant tool for consumers to discover merchants, allowing them to publish desirable incentives and promotions to consumers in real time.

Combining their payment technology with mobile marketing creates their concept of "brilliantly simple" commerce. Model companies such as eBay (EBAY), Amazon (AMZN), and others have been successful with online, but have struggled from a mobile perspective along with Google (GOOG), ISIS, and others. These companies seem to be consistently evolving their go-to-market strategy based on large retail rollouts, while Spindle focuses on the largest business sector in the United States: small to medium businesses (SMB). SMBs represent over 99% of firms, 86% of business locations, 55% of employees, and 43% of sales receipts. A player such as Spindle can focus on the challenges of a smaller business and be agile to changing behaviors. Part of Spindle's positioning however is in its proprietary financial services platform architected and developed in-house.

Spindle also makes its technology available to developers, and with these tools provides a revenue share to its channel partners by leveraging their financial services designation to deliver a more efficient and cost effective process. Spindle reports they are a Payment Services Provider(PSP), which is the new breed of merchant acquirer approved by Visa (V) and MasterCard (MA) and championed by Square. Not to be confused with the card swiper, Square is in the business of acquiring merchants and managing the risk, underwriting, and processing functions internally. Only a limited number of these designated companies exist due to the stringent regulatory, compliance, and technology requirements. This configuration enhances Spindle's value add to its customers and delivers a simple platform for accepting payments.

A recent VentureBeat article discussed eBay Inc. and its acquisition of Braintree, a global payment platform powering the next generation of online and mobile-first start-ups, for a total consideration of approximately $800 million in cash. The article set a valuation for technology-driven companies within the payments industry. Yet Braintree is only a traditional gateway and not a PSP, albeit with incredible developer tools which are friendly to web and mobile companies who wish to accept credit card payments. Over the past few years, Braintree has leveraged their easy to use gateway to grow its merchant base and portfolio.

Spindle is positioning to be a trusted commerce company accepted by both retailers and consumers very much like merchants, and consumers view online giants such as eBay and Amazon today for retail services. Spindle looks to do this to solve a merchant's mobile acquisition, retention, and processing needs for the physical world through mobile. With SPDL's acquisition of Yowza!! and Yowza!!'s current consumer base of approximately 2 million combined with the recent partnership with edoand its 27 million publishing card-linked end points, Spindle has a diverse and robust model for mobile economy.

How does it all fit? Yowza!! delivers free real-time promotions to consumers through their Apple (AAPL) and Android (GOOG) devices. Merchants, on the other hand, use the service as a low-cost, secure and reliable portal to build one-on-one relationships by sending valid and "relevant" offers to existing and potential customers. It's a true win-win situation for both the merchant and the consumer. Through a single web, tablet, or connected device user interface, a merchant within 10 minutes or less can establish a mobile commerce strategy to easily solve specific discovery and payment technology initiatives. Neither Braintree, PayPal, eBay, nor Amazon currently deliver such a solution to their merchants, nor do the large CRM and financial services companies such as Intuit or Sage. Another market differentiator is that unlike Square, LevelUp, and others in the market today, Spindle is hardware and point-of-sale agnostic.

Indeed, in a recent press release about Yowza!!, Vikrant Gandhi, principal analyst for Frost & Sullivan, affirms that, "Spindle's tightly-woven mobile marketing and payments application is already a very compelling solution for the marketplace," to which he adds, "The addition of Yowza!!'s couponing technology will strengthen its position, and give it increased access to many more merchants and consumers."

So sure, with Square's recent $5 billion valuation and their likely forthcoming IPO, it is hip to be a Square investor. Unfortunately, the vast majority of us retail investors will never get a chance to participate in an early-stage opportunity in the exploding mobile payment space with a company like Square….Or will we? Fortunately for many of us, I believe Spindle uniquely offers us "regular guys" a chance to do just that, and stuff a piece of the profits soon to be generated by the mobile commerce revolution into our wallets.
Posted on 9:26 AM | Categories:

Saturday, January 18, 2014

What You Need to Know About Death and Taxes / Few Families Face Estate Taxes at All

Tom Herman for The Wall St Journal writes:  Question:How much can I get taxed if I was left a bank inheritance from my mother of $76,000, or split between me and my sister?    T.J., Philadelphia

Answer:Without knowing all the details of your mother's estate, we can't give a definitive reply. But here are some general points on the subject:

"In most cases, property you receive as a gift, bequest, or inheritance is not included in your income," the Internal Revenue Service says in Publication 17, "Your Federal Income Tax For Individuals" (see irs.gov).

But if inherited money generates income such as interest, dividends or rents, the "income is taxable to you," the IRS says.

The issue can be tricky if you inherit a pension or an individual retirement account. In that case, "you may have to include part of the inherited amount in your income," the IRS says. See chapters 10 and 17 of Publication 17.

You also may be wondering about the federal estate tax. That tax applies only to large estates, says Catherine Grevers Schmidt, a partner at Patterson Belknap Webb & Tyler and head of the law firm's trusts and estates group.

The basic federal exclusion for estates of people who die this year is $5.34 million, Ms. Schmidt says. For 2013, it was $5.25 million.

(However, transfers from one spouse to the other typically are tax-free.) The top federal estate-tax rate on the largest estates is 40%.

If your mother didn't make any taxable gifts during her lifetime and her estate is less than the federal exclusion amount, "then there is no federal estate tax," Ms. Schmidt says.

The number of federal estate-tax returns has fallen sharply over the past decade or so, primarily because of filing-threshold increases.

Check with your state revenue department about possible state-tax issues.
Posted on 8:49 PM | Categories:

Fat Wallet : UPDATE* Official 2013 Tax Software Discounts & Deals / E-Filing Roundup Thread

Fat Wallet published their "Official 2013 Tax Software / E-Filing Roundup Thread", they write: As we get closer and closer to the tax time, we're going to see a lot more deals on Tax Software & E-Filing coming in and out of the thread. I figured I would go ahead and try to round everything up in one post to make it easier for everyone to sort through. I've previously just gone to H&R Block and just had them do my taxes for me, but I believe this year I'm going to try and do this all on my own. Below are deals that I have found on Fatwallet and just looking around different sites. So any tips for me and anyone else who may just be starting up would be highly appreciated. Mods, feel free to sticky this, as I will be updating this thread as much as I can!



I did notice that Fat Wallet is currently doing a contest for the Turbo Tax Federal/ State Software Deluxe Edition. I'm going to provide the link to anyone else, besides myself, who wants to see if they could win it. Instructions for entry are posted lower on the page. Good luck! Fat Wallet Contest Link 

*Please update the Quick Summary with any new tax software deals you come across or remove expired/ OOS ones. Thanks all for the help!
Tax Resource Threads:
2013 Free File Taxes Your AGI $58,000 or Less - Various Programs (Thanks to terriprg)
Turbo Tax's Software Download on KingDeals4U Appears to be Scam (Thanks to tracksupr)
FAFSA Tax Input for College Students for 2014-2015 School Year (Thanks to Wizard83)
Tax Deductibles Volunteering Vacations (Thanks to mooingmooseman)


Turbo Tax Deals:
Turbo Tax 10% Off Online Federal Products
Turbo Tax 12% Off Select Tax Software
Free Federal Filing: Intuit Turbo Tax Freedom Edition (Thanks to terriprg)
Free Access to Turbo Tax 2013 Preperation for State Farm Customers (Thanks to CSREwallet)
Win A Deluxe Edition of Turbo Tax's Federal/State Software (Thanks to akmckenna)
Amazon: $45 Off TurboTax + Quicken Additional for Amazon Prime ($35 Non Prime) (Thanks to rhornor)
Costco: $10 Off Online or B&M (Thanks to SlimTim)
Amazon: Turbo Tax Deluxe Federal + EFile + State - $40 w/ FS for Amazon Prime (Thanks to johnny98)
Amazon: 10% Gift Card Using Refund (Thanks to xelint)
Amazon: $10 Off Home & Business w/ Prime (Thanks to Rookie 555)
Newegg: Intuit Quicken & Turbo Tax Deluxe Federal + State - $63.94

H&R Block Deals:
Free Federal Edition Tax Filing (Thanks to terriprg)
State Tax Filing for Non Qualifying Customers - $14.99
Simple Tax Basic Edition - $19.99
Investors/ Homeowners Deluxe Edition - $29.99
Amazon: $24.99 - $64.99
Best Buy: H&R Block Basic Tax Software for Mac/Windows - $19.99 w/ FS
Rakuten: H&R Block At Home Tax Software Basic + State - $34.17 Shipped


Quicken Deals:
Amazon: Additional $45 Off Turbo Tax + Quicken for Amazon Prime ($35 Non Prime) (Thanks to rhornor)
Intuit: Quicken 50% Off (Thanks to DrummerJoe)

Other Deals:
efile.com: $7 Off State Tax Filings - Use coupon code "SAVE28"
efile.com: 28% Off Any Purchase - Use coupon code "FATWALLET28"
123Print: 25% Off Tax Forms - Use coupon code "TAX25"
Free Start to Online Tax Filing
TaxHawk: Free Federal Tax Turn or $12.95 State Tax Return
TaxAct is only $17.99 for both federal and state efile. Plus, it typically goes on sale as the tax season ages.

*Multiple Deals
Office Depot FAR Software & Tax Software Purchase Rebates for 2014 (Thanks to bpvh)
Amazon: Save Up to $25 on Tax Software & Norton Bundles

Posted on 12:47 PM | Categories:

Priority of Investment Roth 401 vs (T) ( Traditional) 401k

 Over at Bogleheads we read the following discussion:

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
 
Priority of Investment Roth 401 vs (T) 401k *traditional
Postby nickjo88 » Thu Jan 16, 2014 2:04 pm
My wife and I are having a discussion in regards to which account we should fund of her employer sponsored plans.
I am maxing out my 401k. She has the option of a 401k w/ 5% match and Roth 401. I have the feeling we should be maxing her 401 and she would like to contribute to her Roth. We have been unable to convince the other to switch their point of view. She is currenlty putting 25% into each account (total 50%) in attempt to split the max.

I am currenlty doing contract work which may end when we start a family. I would assume a decrease of roughly 40% in gross pay.
I also thught it would be nice to do a backdoor after both 401k are maxed, But I feel my vangourd (t)ira (58K) is an obstacle if I have to pay 28% tax on it.

Does anyone have any good points in either direction?


Current situation:
Tax Rate 28% (227K gross)
Age 30
Emergency-10K
Retirement Accounts:
His VG (t)ira: 58k
His Employer 401k : 24K
His VG (r)IRA 3,400
Brokerage: 1,800

Her Employer 401k: 28K
Her Employer (r)401: 4k
Her VG (r)ira: 3400

Total: 124k

Debt:
223k Mortgage
59K Student Loan
nickjo88
Posts: 5
Joined: 5 Jan 2014
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Re: Priority of Invenstment Roth 401 vs (T) 401k

Postby mnvalue » Thu Jan 16, 2014 3:19 pm
 
If you're in the 28% bracket, the traditional (non-Roth) is the probably way to go. The Roth thing of "don't pay taxes ever again" sounds sexy, but remember that you have to pay taxes now. So a Roth makes sense if you have some rational basis for thinking 28% (your current marginal rate) is less than (or equal to) the rate you'll pay in retirement. Remember that when you pay the taxes now, it's at your marginal (think: "top") rate, but when you withdraw the money, some of it fills the lower (read: "cheaper") brackets first. So even if you expected your marginal rate to be 28% in retirement, pre-tax is still better.

If you do switch the Roth 401k contributions to traditional, keep in mind that for the same $17,500 nominal dollars, that's a reduction in the overall contribution rate. This is because you're paying taxes on top of the Roth portion. So if she's contributing $8,750 to the Roth, she needs to contribute more than $8,750 if she switches to traditional. Since she can't do that in the 401k (as she's already hitting the max), she'll have to contribute to her Roth IRA, possibly via the "backdoor Roth" method, depending on your combined income level. By my math, that $8,750 she's putting into the Roth is worth $12,153 pre-tax [$8750÷(1−.28)]; subtracting the $8,750 pre-tax (traditional 401k) contributions she'd replace it with, the difference is $3,403 pre-tax or $2,450 after tax [$3403×(1−.28)]. So she needs to increase her Roth IRA contributions by $2,450 to keep the same overall contribution level. If she's already contributing the max to the Roth IRA as well, then you need to contribute more to your IRA to make up that difference (again, possibly the backdoor Roth mechanism). NOTE WELL: If either of you wants to do a "backdoor Roth", you'll need to get your T IRA out of the way by rolling it into your 401k.

If this reaches the point where you're both maxing 401ks and Roth IRAs, then the question is: "Is it better to contribute more dollars via the Roth 401k or invest in a taxable account?" That can go either way and may depend on age. The wiki article on tax-adjusted allocation suggests a rule of thumb of discounting taxable by 25% early in your career and 15% later to estimate the effect of capital gains and dividends taxation rules. Since that's less than your marginal rate, taxable investing may make more sense. It also offers you the flexibility to re-purpose those monies for non-retirement use. However, psychologically, the accessibility of that money can equally be a curse, plus the "forced savings" pre-committment strategy of Roth 401k contributions from payroll may mean that more money actually gets invested.

If it were me, I'd definitely max Roth IRAs before contributing to a Roth 401k. The tax treatment is the same, the investment options will certainly be no worse in the IRA and likely will be better, and it gives you some flexibility as you could withdraw those contributions penalty-free in an extreme emergency. (The fact that you can't put the funds back will help temper the urge to spend it frivolously.) But, if I was in your shoes, I probably wouldn't bother if I had a bad 401k, as I wouldn't want to roll my traditional IRA into it. So, if your 401k is good, roll your traditional into it and use Roth IRAs instead of the Roth 401k, at least, even if you don't go all pre-tax. If your 401k is bad, make no changes.
mnvalue
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Joined: 5 May 2013
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Re: Priority of Invenstment Roth 401 vs (T) 401k

Postby livesoft » Thu Jan 16, 2014 3:48 pm
She can always convert her traditional 401(k) to a Roth IRA in retirement while in a lower tax bracket. If that doesn't convince her I don't know what will. Basically, she can have her cake and eat it, too.

I am glad Roth IRAs didn't exist when we were younger. They seem like a big scam for most people. Yes, there is a small subset of folks who benefit from Roth, but those folks don't pay income taxes anyways.

I always recommend:
401(k) for both to max
Roth IRAs afterwards
maybe 529 plan
taxable

and throw in HSA somewhere, too. Probably before 401(k) since one needs health care dollars.

If pay is about to decrease 40% and you are only in the 28% bracket now, you should certainly be below 28% when pay drops.
It's all about market timing, uh, I mean rebalancing, uh, I mean opportunistic rebalancing, uh, I mean short-term opportunistic rebalancing due to a short-term change in one's asset allocation.
livesoft
Posts: 29387
Joined: 1 Mar 2007
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Re: Priority of Invenstment Roth 401 vs (T) 401k

Postby nickjo88 » Thu Jan 16, 2014 4:16 pm
Thank You for the replies.
If we both max 401K, our income is still above the limit for Roth IRA's. By roth IRA, do you mean through backdoor method?

Our 401k's are both through ING, from what I have reviewed and I do need to go into further research, the funds are not that great.
I am comparing these to vangaurd, and the fees seem to be much more. I have been a little hesistant rolling the vangaurd over becasue of the ING options.
nickjo88
Posts: 5
Joined: 5 Jan 2014
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Re: Priority of Invenstment Roth 401 vs (T) 401k

Postby Chadnudj » Thu Jan 16, 2014 4:32 pm
I think in your particular situation, there is a benefit to having your wife do a Roth 401(k) -- namely tax diversification.

You're already maxing out your traditional 401k (and have a traditional IRA), so you're doing well in terms of having money that will be taxed in retirement (potentially at a lower rate). By doing a Roth 401k with your wife's contributions, you're giving yourself wiggle room by creating tax-free at withdrawal sources. A good example is if you were just approaching a higher tax bracket -- if you needed X amount of money for expenses, but that would just put you in a higher tax bracket in retirement, you could withdraw the amount below the tax bracket from traditional sources while taking the little extra over the tax bracket from the Roth 401k.

There is a big caveat here, though -- you could potentially significantly lower your taxable income NOW if you both contribute more/the max to TRADITIONAL 401ks....this might then get you below the Roth contribution limit, or else allow you to take other tax deductions (thinking losses on rental properties, student loan interest) that aren't available above certain income levels.

Really, though, either/both ways are going to have benefits and drawbacks.....it really depends what your goals are, both long term in retirement and short-term.
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Re: Priority of Invenstment Roth 401 vs (T) 401k

Postby Quickfoot » Thu Jan 16, 2014 4:34 pm
We are also in the 28% tax bracket and our priority is tax deferred first, then Roth. We do not expect to be in a higher relative tax bracket in retirement and possibly could achieve a lower tax rate. We have 2 custody battles going on at the same time but next year we'll max both traditional 401k's, our HSA, and a dependent care FSA and any remaining money will either go in a Roth and then taxable.
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Re: Priority of Investment Roth 401 vs (T) 401k

Postby LadyGeek » Thu Jan 16, 2014 6:08 pm
This thread is now in the Investing - Help with Personal Investments forum.
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Re: Priority of Investment Roth 401 vs (T) 401k

Postby bdpb » Fri Jan 17, 2014 3:03 am
At these tax rates (you didn't mention the state tax), contribute the deductible max to both 401k.

Then contribute back-door Roth for her.

Is it possible to roll your IRA into your 401k? If so, back-door Roth for you.

Then pay down debt. Again, you didn't mention your mortgage rate or school debt rate.

Then invest in taxable account.
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Posted on 6:55 AM | Categories:

Bigger Estate Tax Credits in 2014

Justin Stoltzfus for Daily Finance writes: Some interesting recent changes in estate tax planning rules will be useful for individuals and families with relatively high net worth or those who have set aside money or invested in order to gift future generations or hand down money through an estate process.

Sources like MoneyWatch are going over the details of new expansions on tax-free gifts that are going to apply in 2014. These include a hike in the overall unified estate and gift tax exclusion amount -- from $5.25 million to $5.34 million.
A similar increase was made for generation-skipping transfer tax exemptions, MoneyWatch reported. The federal government also expanded the foreign earned income exclusion, though by a relatively small amount, from $97,600 to $99,200 -- a rise of $1,600, or approximately 1.5%.

The new rules for general annual gift exclusions will have a $14,000 cap, which is significantly up from previous years; as late as 2000, the cap was still at the round number of $10,000, which shows it has been rising rapidly since then. Another change involves larger annual gifts to noncitizen spouses, where the annual exclusion is an astounding $145,000.

Practical applications to estate tax planningFor many families, the increase in annual gift exclusions is going to be more immediately practical than the overall estate tax number. Not many families have anything approaching the range of $5 million, which is now adequately covered by overall exclusions.
For individuals who want to bestow more of their wealth during their lifetime, the annual gift exclusion is actually a relevant detail. It shows what is tax-compliant in terms of transferring smaller amounts of money each year, rather than waiting until the estate-handling process to dole out much larger amounts of capital.

Most families are off the hook for federal estate taxesWhat these changes reveal is that as officials use items like the Consumer Price Index to push up the estate tax exclusions, the vast majority of estates will be parceled out relatively tax-free.

With that in mind, it's important to note that the estate tax process doesn't cover many different kinds of financial liabilities that tend to diminish or even erase estate capital by the end of an individual's life. Many of these are related to the provisions of Medicare and Medicaid in terms of end-of-life care -- for example, skilled nursing care costs and expenses related to common health conditions for the elderly.

For families that want to preserve as much of an estate as possible, it's critically important to think ahead and address issues related to end-of-life costs before an individual even enters the Medicare system -- or, failing that, before they end up needing the kinds of expensive services that may not be covered by these social safety nets for seniors.

With so much of a political focus on entitlement programs and their continued administration, there's even more of an urgency for families to consider retirement costs as part of a comprehensive way to address estate tax planning. However, it's also necessary to keep a close eye on these kinds of actual federal tax rules on transferring wealth through generations. A family that needs to set up more particular systems to avoid different kinds of financial liability can look at the generation of specialized trusts and custodial accounts that can apply to a multigenerational financial-planning process.

It's also important to look at another piece of the pie, which is retirement investment. Good IRA planning helps to grow capital tax-free; good estate planning helps individuals to preserve the resulting capital for future generations.
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