Ask the grumpies: How do you reduce your taxable income if you’re high income?

Michelle asks:

What if you make more than 186K jointly and want an option for reducing your taxable income? Can you still invest in an IRA?

Standard disclaimer:  We are not professionals.  Consult a professional with fiduciary responsibility and/or do your own research before making important monetary decisions.

In 2017, if you make more than $133,000 you can purchase a traditional IRA but doing so will provide no tax benefit (more than 118K, and you only get a partial tax benefit).  You can roll that traditional IRA over into a Roth IRA, but Roth IRAs do not reduce your taxable income this year.  Roth IRAs decrease your taxes on earnings in the future when you start living off those retirement assets.  (That 186K number is the beginning limit for the Roth IRA.)

What can you do to reduce your taxable income?

  1.  Contribute the maximum to a traditional 401(k)/403(b)/457 through your work if that’s available– if you have Roth versions that these won’t decrease your AGI (taxable income) this year, just at some point in the future.  If you have both a 403(b) and a 457, you are allowed to contribute to the max for each (but you can only contribute a total of 18K to all your 401(k) options, although if your company offers a mega backdoor roth option, that’s a way to shelter future income by putting away up to 36K this year)
  2. Contribute to an HSA (health savings account) through your work if that’s available.
  3. Pay a lot of interest on a mortgage (not the best idea for your finances overall, but it may decrease your AGI depending on where it hits compared to the standard deduction).
  4. Sell stocks or other investments at a loss.  If the loss is big enough you may be able to carry those losses over to future years.  Again, it’s nicer to get profits than to get losses, but there’s a little benefit in terms of decreasing your AGI.
  5. Donate a bunch to charity, or start a donor-advised fund to donate a bunch of charity in the future and to get the tax break now (you won’t get the tax break later when you actually give the money away though).  Again, be aware of standard deductions and alternative minimum taxes.
  6. Something I don’t understand called a “bond fund swap” which sounds a bit sketchy, but a lot of tax dodging saving stuff is sketchy.
  7. Have a baby or adopt a kid (again, not an overall money saving strategy, but it will help your AGI).
  8. Pay a lot in state taxes possibly by moving to a place (for work!) that has higher taxes.  (See above about not overall money-saving.)
  9. Those moving expenses that aren’t reimbursed may also be tax deductible.
  10. Have a bunch of job-related expenses.
  11. Plan when you pay your home-owners taxes so that they make the most tax sense, which may mean doubling your payment one year and not paying it the next (this will depend on your other deductions and the standard deduction).
  12. Keep all your receipts for itemized deductions, even little things like $5 donations.
  13. Marry someone who makes a lot less than you do.  (Or divorce someone who makes close to what you make.)
  14. Pay alimony.
  15. Put off taking retirement income until you have to.
  16. If you have high medical expenses (>10% of your AGI), bundle them as much as you can into one year.
  17. If you have self-employment income, look into the SEP and Solo 401(k).  Also make sure you’ve accounted for all business expenses and maybe make some business expenses.  You may also be able to do some dodgy things about paying your kids as employees.
  18. If you have a rental property, make sure you document your costs.
  19. You can deduct some money for qualifying education expenses.

Grumpy Nation, what other suggestions do you have to lower Adjusted Gross Income?

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Should you ever fill a non-tax-advantaged IRA (answer: maybe): An obnoxious post from having upper-middle class income

Now that DH’s income is back and I’ve GOTTEN PAID(!) for the first time this school year, it’s time to start up our obnoxious money posts again.  (Maybe you’ve noticed the new tag?)

This time we turn to planning for college.  If I’d known where we were going to be today I’d have planned things differently back when DC1 was born and opened up 457 plans earlier instead of saving in 529s or prepaying the mortgage.  Sunk cost!

People with upper-middle class income who plan to send their children someplace that isn’t a state school have an incentive to do some creative things with money before their children hit their junior year of high school.  The reason for this is that they’re on the margin of financial aid for some pretty expensive places.  Forbes has a bunch of articles about our “predicament”.  Check out the colorful charts in this one.  In it, you’ll note that AGI of 125K to 275K are eligible for some financial aid at various 4 year colleges if they play their cards right.

What does playing your cards right mean?  Well, a lot of playing your cards right is moving income from places that the CSS and FAFSA consider to be available for paying for college to those that the CSS/FAFSA consider to be out of bounds.  A big portion of that is moving regular assets and investments into retirement accounts.  (Here’s an article on how much cash is excluded from FAFSA formulas.  Here’s info on how different asset types are affected.)  5.64% of your non-excludable assets are expected to be available for paying for college.  Retirement savings, even non-tax-advantaged retirement savings, are not included in any of the financial aid calculations.

And that’s where the non-tax-advantaged traditional IRA comes in.  If your (married) joint adjusted gross income is less than 186,000 (for 2017), then you can just fill up a Roth and hide money into a retirement account in a tax-advantaged way.  If you have a workplace retirement plan available, then you can only get the full tax advantage from a traditional IRA plan if you make (jointly) less than $99,000.  More rules for single parents, those without retirement accounts, etc., are available here.

So if you’re in that upper-middle-class income range, have extra money floating around in taxable string-free investments and have children likely heading to private colleges in the future, it might be a good idea to start moving those over into traditional IRAs at the rate of $11K/year for a couple.  Should you do this instead of filling up a 529 with that 11K (if you can’t afford to do both)?  I don’t know– it’s probably best to sit down and crunch the numbers yourself given your age, preferred retirement age, targeted colleges, income, expected student loan rates, and so on.

Of course, because of loopholes in the tax code, it’s possible to turn that non-tax-advantaged traditional IRA into a backdoor Roth.  Here are some pitfalls to look out for if you choose to go that route.  And don’t do it if your eldest is in college or even a junior or senior because it will show up on an aid form according to Forbes.

So where are we?  Accumulating assets while we’re both employed.  DC1 on track to go to college in ~6 years.  That leaves ~4 years to try to move money around.  The easiest way to hide money from colleges would be to move to Paradise and to buy a house there because then we’d be back in debt with all our extra cash going towards retirement and the mortgage, plus there’s no guarantee I’d be employed at all.  But it’s unlikely we’d be able to actually do that given my, you know, career and stuff.  So it probably wouldn’t hurt to start making these asset moves.  (And we should replace our cars and remodel the kitchen at some point and maybe time finally getting that donor advised fund to a year that will count for financial aid calculators.)

I already save in a 403(b) and a 457 at work plus have required retirement savings on top of that  I don’t really *want* to save another $5,500 for retirement in my name.  DH only has a 401(k) and it’s not set up properly, so he ends up getting some of the money contributed back after the company does their taxes.  Right now I think we’re probably only going to do one traditional IRA and it will be DH’s.  I believe we have about $30 in another traditional IRA (we converted all our traditional IRAs to Roths back when it was first allowed, but one of them dripped during the conversion).  So it shouldn’t cost much to do the conversion unless the stock market goes crazy between putting the $5,500 in and converting.

If we made more, it wouldn’t be worth even thinking about all this stuff.  But we’re in that range.  And I’m not crazy about our state flagship.  So, this is where we are.

Have you ever put money away for retirement without getting the tax advantage?  Are you thinking about hiding assets from college financial aid calculators?

It is harder to give directed donations to a public school than to a non-profit

This year, we want to give money to DC2’s classes (English and Spanish) to help them purchase items for “differentiation, independent learning, and/or enrichment”.  This is mainly because DC2 needs them, at least on English days.  (“Mommy, I’m in the green group which means that we have the trickiest problems, but they’re still way too easy.  I already know all the sight words from preschool.”)  We want this to be anonymous because it’s just weird giving money to public school when DC2 is a member of the class.  (We know the Spanish teacher already incorporates differentiation, at least in second semester from our class observation last Spring.  The English teacher does a little bit according to DC2, but maybe not enough for DC2 right now.)

When we did this back when DC1 was in Kindergarten in private school, it was super easy, we just wrote a check along with a little note outlining the particulars of the gift.  Since we were already paying tuition to the private school we were also able to talk to the teacher about what her ideas were and make sure the money would be of interest even given the strings attached (that it be for differentiation/independent learning activities).

This time DH called up the front desk and they said they couldn’t take directed donations of money, only general donations for the entire grade, but to contact the PTO president to see if she could help.  After some back and forth with her, the PTO president reiterated that she could only take donations for the entire grade and they would go towards defraying the cost of field trips, but she’d get in contact with the Assistant Principal on our behalf.  After a couple of weeks of not hearing from her, DH emailed the school Principal directly.   A couple days later the school principal emailed back and offered the following options:

  1. Write a check to the school and the teachers would be told they could use that money, but only through the district’s preferred vendors.  The vendors are not actually that great, so their ability to make purchases would be pretty limited.
  2. Provide several gift cards for Amazon/Walmart/Target so they have more options for what to purchase (though this also is limiting, and we might not get the amounts right).
  3. Provide gift cards for cash from Visa/Amex/Mastercard.  This would be the least limiting of the choices.

Oh gentle grumpy nation, I have been trying so hard to get #3 to work.  But we want to get two $500 gift cards (one for each class) and Target/Walmart only carry Visa in $200 or less denominations, and it costs $6-7 to get one.  You can’t order Visa gift cards directly from Visa and we don’t belong to one of their participating banks that waives fees.  AmEx looked really promising with a flat $4 fee per $500 card until I tried to check out and realized there was an additional $8.95 shipping charge on top of that*.  But maybe it’s worth it since to get Visa cards at Target or Walmart we’d be paying $24 just to get $800 in gift cards.  (Mastercard is not an option because they start making the money disappear once there’s inactivity.)

I might be able to waive some fees if I wait for October’s promotion codes to show up somewhere– September’s AmEx promo code got rid of shipping costs but they’ve since expired.

Or we could just write a check and they’d be limited to the list of preferred vendors, none of which I’ve heard of.  (I have to wonder what kind of grift is going on there…)

Anyway, I’m leaning towards paying the exorbitant fees for turning plastic credit money into anonymous plastic gift money so that they can use the money wherever they want (albeit, maybe only places that take AmEx…).  Though with a minimum of $17 in fees, it’s tempting to go with Amazon cards since you can buy most things on Amazon.  Except, you can’t buy everything on Amazon.

We have our first (15 min) parent teacher conference uh… today.

*Looks like they regularly have online discounts for things like shipping fees, but October’s wasn’t up yet when I wrote this post.

What would you do, Grumpeteers?

Link Love

The headline says it all.

Americans want jobs, not low paying work.

Every member of congress who took money from the NRA and tweeted thoughts and prayers to las vegas

The rest of that thread is worth reading too.

Ugh Texas

Advice for how to handle a hands-off graduate advisor

Why go curry cracker overdrew her bank account on purpose

Take that high school physics teacher who gave us a bad write-up for our Mars project because we addressed the psychological aspects (and uh, this was one of our suggestions., though for a slightly different reason..)

The caption on this one is pretty funny.

Congrats to OMDG!

If you ever wanted to see cathedrals trash talking each other, this thread is for you

want

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I now pay convenience fees

Time is at such a premium these days that I just pay the little “convenience” fees that I used to refuse to pay out of principle.

It started with me deciding it wasn’t worth it to drive to a farther gas station just to not get hit with an extra fee for using my credit card rather than cash.  (And I haven’t carried cash with me in over a decade, so I definitely wasn’t going to start.  Plus, with cash the signs say you have to pre-pay for gas which means either overestimating or not getting a full tank.)

Then I started telling DH to just pay the “convenience fee” for electronic tickets at the movie theater rather than having to stand in line to pick them up.

Then I started paying our insurance with a credit card online instead of writing a check. (Though they’ve since dropped that fee. Yay.)

And mailed checks for all our small state taxes like car registration renewal instead of standing in line at the courthouse.  (Though maybe we’ve been dong this one for years…)

I’m not sure how I feel about this.  I mean, from an economics standpoint, they’re chipping away at my customer surplus through price differentiation, but it’s also rationally worth it to me to pay for the privilege of not jumping through their hoops.

And it’s true that these little fees add up.  But they add up to a dollar here or a dollar there.  Far less than the latte factor.

If we were making less money, every dollar would count.  But these dollars just don’t count anymore.  And our time and the hassle factor are just worth so much more to us.  This is another way it’s really nice to be upper-middle class.  A year of these fees is less than an hour of work.  Even saved and invested they’re not going to matter in the long-run.

Do you pay convenience fees?  If so, when did you start?  Do you notice convenience fees?

A small rant about bad retirement options

It all started when we asked SIL if she could open a 529 account for her second child so we could contribute to it as we’d been contributing to that of her first child.

She told us that her financial advisor at work had told her not to open a second 529 plan.  I wondered at the quality of that advice as we’d recently done an ask-the-grumpies post on that very topic.

DH asked who her advisor was.  Turns out it’s some company named AXA.  If I say too much that’s terrible about AXA, their lawyers will likely contact us, just like they did the owner of the finance for teachers site.  AXA features (along with a similar company named Legend) in the  NYTimes article(s) below about 403(b) plans that are a terrible deal for teachers because of their high fees and lock-in periods.

It makes me so mad that we’re doing this to our teachers!  Especially since teachers from my parents’ generations have great defined benefit pensions, while those starting out now are, like the rest of us, largely dependent on putting money from our take-home pay into defined contribution plans.  It is terrible that for many of them, their only 403(b) options are eating away at their retirement savings with high fees and bad advising that pushes them into higher fee funds.  K-12 teachers (especially those who aren’t high school math teachers and maybe should know better) should be able to trust that their employer is going to pick out a good plan so all they have to do is save money for retirement.  Why can’t TIAA-Cref manage more K-12 403(b) plans?

I mean, it’s bad enough that my FIL’s company uses Edward Jones.  (This summer upon retirement, he informed me that he would be saving 10K/year rolling over his retirement assets to Vanguard on retirement.  My MIL noted that’s equivalent to 4-5 online classes she does not have to teach.  Made that generous $200 donation his EJ broker gave each year to his local hunting club fundraiser seem pretty negligible.)  I am so glad we got him that Bogleheads book on investing after his nth email asking us about some risky single stock his EJ broker was pushing on him.

Do you have decent 401(K)/403(b) retirement options at work?  How big are the fees on your plan?

Ask the grumpies: Saving concurrently vs. consecutively for big financial goals

Sandy L asks

Opinion. Pros and cons of saving concurrently vs consecutively for big financial goals.

Wow, this is a really intriguing question that I hadn’t really thought about before.  We talk a lot about this in terms of debt repayment– should you pay off debts concurrently vs. consecutively, and if consecutively, in what order, but I’m not sure I’ve seen this one addressed on the PF blogosphere in terms of savings.  I guess Dave Ramsey is like, get your emergency fund in order first, but after that… huh.

Because money is fungible, maybe in the grand scheme of things it doesn’t really matter.  If you’ve been saving up for a vacation and your car gets totaled, you can take money from the vacation fund (and the emergency fund) and put it towards the car.

Some money isn’t fungible though.  Should you save for retirement first and then 529s for the kids, or should you do both at the same time?  What about vacations?  What about houses?

I think really you have to do a bit of both, or if not both, then break up your savings goals into pieces and save them consecutively that way.  What I mean by this is, for example:

  1. Get some form of transportation to work and some form of housing.
  2. Save up an emergency fund of $X.
  3. Put enough in your retirement that you get the match.
  4. Save in an HSA
  5. Put some money in for a down payment (YMMV depending on your housing situation, income, etc.)
  6. Put more money in your retirement fund to what you “should” be saving given your years to retirement and income
  7. Save for a bigger emergency fund
  8. Max out retirement
  9. Finish saving for a down payment (YMMV) and buy a house
  10. Vacation fund (most people will put this earlier– I think of it as more of a luxury than 1-8, but some people are willing to make trade-offs)
  11. Start saving in a 529 for the kids
  12. Save for a new car
  13. Prepay the mortgage

and so on… [As always, YMMV and you should do your own research and/or talk with a professional prior to making major decisions]

Some of these will be maxed out each year (ex. retirement), but some are much more lumpy (ex. new car).  So you probably can’t do a lifetime of retirement savings before saving for other things unless you are extremely high income and low spending, but you may be able to max out your tax-advantaged funds each year.

Some people get really motivated for saving for vacations or cars or houses.  It’s possible that saving for these might work better in a savings snowball, one at a time.  On the other hand, cars and housing are generally more necessary than vacations, but vacations cost less than cars and houses and you might have to wait 10 or more years before going on a vacation if you put off saving until you have a downpayment.  If you save for the vacation first, you might end up going on too many vacations or you might take vacations too soon.  (Still, money is fungible and there’s nothing really preventing you from taking vacation money out of the house fund…)

Some saving needs to be automated because it just isn’t easy to save for otherwise.  It’s easy to do automated saving concurrently because it all happens without you paying attention.  In addition, changing up the automation requires attention, which means that you might not get around to saving for the next item on your list if you try to do automated saving consecutively.

[Update:  See some discussion in the  comments about diversifying risk vs. return for saving/investing goals.]

What do you think, Grumpy Nation?  What are the pros and cons of saving consecutively vs. concurrently?  What do you do?