Making $175k/year. What do I do with it all?

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kite
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Making $175k/year. What do I do with it all?

Post by kite »

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kramer
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Re: Making $175k/year. What do I do with it all?

Post by kramer »

It's up to you. I was in a similar situation and decided to focus on retiring early and did it in about 10 years. I thought about starting my own business, and that was my original goal, but I decided that I was making too much money for that to make sense for me -- I had no desire to be Mega-Rich. I saw a clear path just being a regular employee and saving most of what I made by living frugally and debt free.

My advice is that, for now, focus on learning the basics of investing as espoused on this board. Continue to max all your tax deferred savings options and put the rest in taxable savings. Enjoy your job while it is still there and before you possibly get burned out.

Don't become like many of my ex-co-workers: Don't Spend It All or Get a Huge Mortgage or Get Divorced.

I am skeptical about the legitimacy of your incorporation idea.

After this, you will have to think longer term about what your real goals in life are: Retire Early, Get Married and Have Kids, focus on becoming Mega-Rich, focus on Career Advancement, Charitable Giving, Go Part-Time after Financial Independence, etc. (and you don't have to choose just one).

Finally, a word of warning, after 10 years I got really burned out. It is best to be in a strong financial position so that you always have options.
Texas hold em71
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Re: Making $175k/year. What do I do with it all?

Post by Texas hold em71 »

You should probably check your Roth. Not sure, but I think you are over the limit to contribute. You can still use the back door method. Check the 2014 limits to be sure.

Otherwise, you are on the right track. Don't forget to enjoy life along the way.
Cuzz35
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Re: Making $175k/year. What do I do with it all?

Post by Cuzz35 »

I apologize for the incorrect comment.
Last edited by Cuzz35 on Fri Jan 17, 2014 11:50 am, edited 3 times in total.
brajalle
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Re: Making $175k/year. What do I do with it all?

Post by brajalle »

Cuzz35 wrote:If you incorporate as an S-corp all your earnings that aren't part of the salary you pay yourself will flow through as self-employment earnings and still be subject to FICA taxes. Sorry no getting around that one.
Yes, you can't escape FICA/Medicare...mostly. The flexibility of an S-Corp is advantageous in two ways - firstly, as long as you are being paid a reasonable salary for your position/industry, then you can choose to take any extra profits as dividends instead of income. This has several tax advantages. Secondly, you could set up a solo-401k or the like through the company, and set the business up to match up to 25% of your salary (or like up to 40-50k some such if 25% is higher). This allows you to circumvent the $17.5k (or whatever) contribution limit into tax-advantaged space.

Of course, there are several downsides to this approach, but there can be tax advantages if you set it up right.
EnjoyIt
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Re: Making $175k/year. What do I do with it all?

Post by EnjoyIt »

Definitely self incorporate. C or S corp. With a solo 401K You can have employer (you) match up to 25% of your income, plus you can invest your own 17.5K. Then do your HSA, and backdoor Roth if you have cash left over. If you still have more, a taxable account will do.

I can see how you feel taxes are eating you alive, but at your salary with all the tax advantage retirement allocations, I get your effective tax at about 14%. And that is if you don't have enough for itemized deductions, school credits, mortgage interest, property tax, business expenses and so forth
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tcjbum
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Re: Making $175k/year. What do I do with it all?

Post by tcjbum »

Re: #4, if you're a W2 employee, I'd think carefully about breaking off to become an independent contractor. You'll be paying double the FICA on the wage portion of your income in the form of self employment tax, and the IRS gives poor guidance on what a "reasonable" salary is. Don't be too aggressive with bringing down your salary to avoid FICA taxes - the IRS may not like it, and they're apt to recharacterize all of your income as wages.

One of the other funny little benefits of W2 work is the fact that if you ever does get laid off, your state's unemployment benefits will kick in during your job search. Your employer pays for this. As an S or C Corp, plan to pay in to your state's unemployment insurance program (experience rated - a little over 3% in my state for a new corp), and plan to fight like hell with your state's UI office if you ever do wind up in a position where you need to make a claim. It sounds like your gig is steady eddy, so this may not be a big deal, but for the risk averse, it may carry some weight.

Edit: Also, any distributions, at least from an S Corp, must be reported as ordinary income, and accordingly, won't be taxed at the more favorable capital gains rate. An S Corp isn't going to bring down your marginal rate, it's simply going to let you avoid the self employment tax on a portion of your income.

Personally, I don't think you're bound to gain much, if anything, by opting for 1099 work over W2 work, no matter how high your income is.


JB
BenBritt
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Re: Making $175k/year. What do I do with it all?

Post by BenBritt »

You might consider giving to charity. There are many. Due diligence of course.
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Clark Griswold
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Re: Making $175k/year. What do I do with it all?

Post by Clark Griswold »

Just out of curiousity, what do you do?
Reappraiser104
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Re: Making $175k/year. What do I do with it all?

Post by Reappraiser104 »

Was in a similar situation in 2013. I wish I had an S-Corp. I maxed out my Solo-401k which was nice and reduced my personal income taxes significantly. However, the solo 401k does not reduce your self-employment taxes. If you don't have significant write-offs, the self employment taxes alone can wipe out the incentive of starting the business.
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Bogle101
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Re: Making $175k/year. What do I do with it all?

Post by Bogle101 »

Clark Griswold wrote:Just out of curiousity, what do you do?
Investment banker?
40% Extended Market | 40% S&P 500 | 10% REIT | 5% State Muni Bond | 5% Cash
SeattleCPA
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Re: Making $175k/year. What do I do with it all?

Post by SeattleCPA »

Cuzz35 wrote:If you incorporate as an S-corp all your earnings that aren't part of the salary you pay yourself will flow through as self-employment earnings and still be subject to FICA taxes. Sorry no getting around that one.
Just to make sure there's not confusion, the above statement is wrong. The distributive share out of an S corporation (the leftover part) isn't subject to self-employment tax. And this is exactly the reason why 4 million small businesses use the Subchapter S election.

BTW, to comment on another poster's assessment of the S corporation, the thing about the S corporation is that often the election does save someone several thousands dollars a year (per shareholder-employee) in payroll taxes.

Sometimes these savings come from paying an unreasonably low wage. And that's risky and not right.

But othertimes, the savings come from double deductibility that occurs. A SEP contribution and the employer's match on a 401(k), for example, become deductions both for income taxes and for self-employment/payroll taxes if you operate as an S corporation. (In comparison, if you operate as a sole proprietorship, these items only save income taxes.)
MnD
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Re: Making $175k/year. What do I do with it all?

Post by MnD »

A redhead with a family history of having twins should solve your problem. 8-)
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
SirOvlop
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Re: Making $175k/year. What do I do with it all?

Post by SirOvlop »

SeattleCPA wrote:
Cuzz35 wrote:If you incorporate as an S-corp all your earnings that aren't part of the salary you pay yourself will flow through as self-employment earnings and still be subject to FICA taxes. Sorry no getting around that one.
Just to make sure there's not confusion, the above statement is wrong. The distributive share out of an S corporation (the leftover part) isn't subject to self-employment tax. And this is exactly the reason why 4 million small businesses use the Subchapter S election.

BTW, to comment on another poster's assessment of the S corporation, the thing about the S corporation is that often the election does save someone several thousands dollars a year (per shareholder-employee) in payroll taxes.

Sometimes these savings come from paying an unreasonably low wage. And that's risky and not right.

But othertimes, the savings come from double deductibility that occurs. A SEP contribution and the employer's match on a 401(k), for example, become deductions both for income taxes and for self-employment/payroll taxes if you operate as an S corporation. (In comparison, if you operate as a sole proprietorship, these items only save income taxes.)
The above statement by SeattleCPA is exactly how my accountant explained it to me. What really helped make things clear was when he ran through a few scenarios...e.g. FTE w/ high salary, W2-contractor, LLC w/ S-election, etc....with breakdowns showing what I would be able to save in tax-deferred, total tax liability, etc.
TSR
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Re: Making $175k/year. What do I do with it all?

Post by TSR »

I can't answer your tax/incorporation questions, but here are a few comments:

1. Agree that you probably can't contribute directly to the Roth in light of your high income. You may have already screwed this up this year, but take a look and see if you need to fix it.
2. Read up on the Backdoor Roth in the wiki here: http://www.bogleheads.org/wiki/Backdoor_Roth_IRA
3. Read up on I-Bonds in the wiki here: http://www.bogleheads.org/wiki/I_bonds -- this is another tax-advantaged option that I don't believe you're taking advantage of.
4. You're at an age where life is about to hit you with a lot of extra extra expenses -- possibly kids, marriage, desire to own a house, etc. Your income is high but not so high that life feels "easy" for everyone at that income level. I would strongly recommend saving money with an eye toward some high expenses three to ten years out (that is, keep some money in places where it is easy to get access to, whether that be in I-Bonds, CDs, etc.).
5. Not sure it's clear from your post what your living situation looks like, but if you own a home you can also consider paying off your mortgage. If you don't own your home, I would consider starting a separate fund for saving for a large down payment. (Not that you MUST purchase a home, but people often start to want to purchase a home around your age.)

Best of luck.
Chadnudj
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Re: Making $175k/year. What do I do with it all?

Post by Chadnudj »

I can't answer your tax/incorporation questions, but here are a few comments:

1. Agree that you probably can't contribute directly to the Roth in light of your high income. You may have already screwed this up this year, but take a look and see if you need to fix it.
2. Read up on the Backdoor Roth in the wiki here: http://www.bogleheads.org/wiki/Backdoor_Roth_IRA
3. Read up on I-Bonds in the wiki here: http://www.bogleheads.org/wiki/I_bonds -- this is another tax-advantaged option that I don't believe you're taking advantage of.
4. You're at an age where life is about to hit you with a lot of extra extra expenses -- possibly kids, marriage, desire to own a house, etc. Your income is high but not so high that life feels "easy" for everyone at that income level. I would strongly recommend saving money with an eye toward some high expenses three to ten years out (that is, keep some money in places where it is easy to get access to, whether that be in I-Bonds, CDs, etc.).
5. Not sure it's clear from your post what your living situation looks like, but if you own a home you can also consider paying off your mortgage. If you don't own your home, I would consider starting a separate fund for saving for a large down payment. (Not that you MUST purchase a home, but people often start to want to purchase a home around your age.)

Best of luck.
I agree with TSR here. Max out the 401k, contribute $5500 to the IRA (regardless of whether you convert it or not to a ROTH....given your high income, it's possible that you're better off in traditional, although you may make too much to deduct your IRA contributions), explore iBonds.

I note that you also say you rent an apartment. If you're serious about trying to reduce your tax burden, buying a home/condo is one way to do it, just because it increases your available tax deductions. Just make sure you're conservative here -- put down 20% or more, get a low interest mortgage, etc. Then you can deduct your interest, etc. It might even free up more cashflow, if you buy conservatively so that your mortgage payment is less than your current $1000 rent.

Charitable donations are another great way to lessen your tax burden, too. And do you have a high deductible health plan at work? If so, max out your Health Savings Account....
mall0c
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Re: Making $175k/year. What do I do with it all?

Post by mall0c »

kite wrote:I am 29 years old with a secure job. I just recently took a new job (same career) where I am being paid much better than I was. Went from ~115k to ~180k. For the 6 years I’ve been working, I’ve tried to max 401k's and Roth IRA's but wasn't entirely consistent due to school loans, bad choices, moves, etc... However, I have managed to save ~110k in a 401k and ~20k in a Roth IRA, currently. With this new job I am already maxing out my 401k and Roth IRA and then taking other savings into a personal brokerage account (current balance is ~20k).

I have several questions:

1. I am making way more money than I ever expected to and I'm not sure if I should be using Roth IRA's or regular IRA’s.
2. What else should I be doing besides maxing out 401k, Roth IRA, HSA, and personal investing account?
3. I would like to make more money - with this kind of salary should I be doing something besides "retirement savings”? When I used to play video games, any amount of money or resources I acquired I immediately sunk into something that would make me more money/resources. Is the stock market the only option for that in real life? Anything else realistic?
4. This is the most complicated. I am getting eaten alive with taxes. The 175k is payroll so I'm paying top tax rates. I have a possible opportunity to incorporate my self (S-Corp) and pay myself a legitimate wage and take the rest as a once-a-year capital gains distribution (15% tax). Is doing this a no brainer? My company does 4% match and has horrible insurance so the tax savings would more than outweigh what they're providing.

I have no debt except a $300 car lease and I pay $1000 rent for an apartment.
Listen to Kramer, solid advice there.

1. Roth's are still worthwhile unless you somehow qualify for a deductible tIRA, which you almost certainly don't because of your 401k.

2. As has been mentioned, i-Bonds are a good place to put $15k per year. They are extremely flexible. Also the PenFed 3% CDs are a pretty good option right now.

3. A low-cost broadly diversified portfolio of stock and bond index funds is a pretty good bet for building wealth over time.

4. You can incorporate yourself but you are still going to have to pay all the same taxes on your W2 wages from your employer unless you can convince your employer to instead pay you as a 1099 contractor through your company, which is almost certainly not going to happen. The IRS does not like it when you incorrectly (falsely) classify employees as consultants and your employer is certainly aware of this.
Last edited by mall0c on Fri Jan 17, 2014 11:57 am, edited 1 time in total.
FIRE'd. Mid-40s.
Drage13
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Re: Making $175k/year. What do I do with it all?

Post by Drage13 »

kite wrote:When I used to play video games, any amount of money or resources I acquired I immediately sunk into something that would make me more money/resources.
And let me guess, you build your defences up first, weathering early attacks, while upgrading your units to the maximum level and building a large army before venturing forth to crush your opponents? :wink:

1. To be honest, whether to go Roth IRAs depends on when you think you'll need the money and what you think your tax situation will be when you need it. For example, I wish to retire young, so I prefer Roth IRAs. I also think tax rates are due to rise, so another added bonus there. However, I run a risk of losing out by finding myself in a lower tax bracket than what I am not, possibly even if tax rates go up. I think you're well suited to a mix of both.
2. You can't max out your after-tax account. My opinion? Dump money in until it hurts. :D
3. There are other ways outside of stocks and bonds, but I would argue that they require "more" time and/or knowledge (as in, in addition to what you already need to know to handle your current accounts) than just stock bonds. I'm referring to things such as real estate, lending (i.e. peer-to-peer as an example, though this is arguably a bond), starting side businesses, buying "turn-key" businesses, etc. Personally, there's only so many hours in a day, and stocks and bonds can get you exposure to these other things already; why branch out unless you've got time to throw at it as well as money?
4. No clue; my father runs a business and has done the dividend payout in the past, so I've heard of that. I believe he is an S-Corp.
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kite
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Re: Making $175k/year. What do I do with it all?

Post by kite »

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EnjoyIt
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Re: Making $175k/year. What do I do with it all?

Post by EnjoyIt »

I think you are confusing an S corp and a C corp.

If you have a c-corp you can minimize those taxes by giving yourself a bonus at the end of the year, but that cash you sent over had to first be taxed at the corporate rate
0-50K at 15%
50K-75K at 25%
After you pay those taxes, then you send that money to yourself and pay taxes on them again. This is not a good plan for you or really anyone else. Especially now that dividend taxes are higher for high income earners.

Next, there is a limit to what you can contribute to a SEP IRA or SOLO 401K and that is 25% of your income. I like the solo 401K because you can then also do a backdoor Roth which you can not do in a SEP. That brings me to the last point. You can save on self employment tax by 75K or you can maximize your 401K contributions. You can't do both. personally I would do the latter, but some excel calculations could prove me wrong.

BTW, this is exactly what I do but in an S-corp.

Lastly, if you have a home office, a company car to go from home office to business office, any business related travel, etc these are all tax deductible business expenses that you don't get if you are not self employed.
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SeattleCPA
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Re: Making $175k/year. What do I do with it all?

Post by SeattleCPA »

Beckmaster is right... you're getting c corp dividends and s corp distributions mixed up.

BTW, an s corp can pay dividends that when received by shareholders get taxed at 15%.... so maybe you've found some web reference that talks about that...but that special case only occurs if those profits used to pay the dividends have already been taxed in the past (because the corp was then a c corp)...

I think you probably need to do some more research in order to make sure you understand the mechanics.

Also, I won't do the broken-record thing and post a link again to the article at my blog that walks you through the steps, but setting your salary high so you can do bigger pension contribution doesn't really work that well if you do the math right.... and it can cost you money.
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kite
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Re: Making $175k/year. What do I do with it all?

Post by kite »

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mall0c
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Re: Making $175k/year. What do I do with it all?

Post by mall0c »

kite wrote:Several people have commented on the S-Corp idea, for and against. I've researched this quite a lot and I believe this is the scenario I would pursue. My current company hires me back as a 1099 contractor and pays my corporation.
Not to rain on your parade but what you are describing is illegal. Speaking as someone who was an employee and a contractor and is now a business owner that employs employees and contractors, your company can't just switch you from W2 to 1099 so that you can both avoid paying FICA taxes. There are strict guidelines for what constitutes an employee (W2) and what constitutes a contractor (1099) and the IRS has gotten increasingly more strict with enforcing this over the years. Many larger companies have entire departments dedicated to maintaining compliance with these standards. The fact that you are now classified as a W2 means you are going to have an especially hard time justifying your switch to 1099 without making some fairly dramatic changes in the nature of your relationship with your employer.

http://www.irs.gov/Help-&-Resources/Too ... tractors-1
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niceguy7376
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Re: Making $175k/year. What do I do with it all?

Post by niceguy7376 »

OP,
reaching the pre-tax limit of 51K to 401K is not as easy as you think and might not be beneficial. Thats the point that SeattleCPA is mentioning.
Also moving from W2 to 1099 with same employer is not as easily allowed by your current employer because as many posters have said, IRS is more strict on it recently.
Anyway Let me give you an example:
Since you are earning a salary of 175K with vacation time and such, say your employer agrees to 1099 and pays 100/hr (50 weeks at 40 hours at 100/hr) , you will get 200K.

Say you take salary of 100K and contribute 17.5k to 401K.
Your company can only contribute 25k (25% of your salary of 100k) = 25k
Net to 401K is 25+17.5 = 42.5K.
Say you have some other expenses on company and adding company SS+med of 7.65% of 100K = 15K.
Total exp = 25k + 15k = 40K
Sal + exp = 140K.
left over money is 60K. this comes to you as K1.

If you want to maximise to 51K, then you need to run 135K and contribute 17.5K. Comp can contribute 25% of 135K = 33.75K. Tot contr = 51.25K. 250 more than limit. What is left is 200-135-33.75- 15k (SS, Medi, other exp) = 15k that comes in as K1.
EnjoyIt
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Re: Making $175k/year. What do I do with it all?

Post by EnjoyIt »

SeattleCPA wrote: Also, I won't do the broken-record thing and post a link again to the article at my blog that walks you through the steps, but setting your salary high so you can do bigger pension contribution doesn't really work that well if you do the math right.... and it can cost you money.
That is correct depending on what tax bracket you are in. If you are in the 25% bracket, setting your income at 138K to maximize a solo 401K with 25% employer and $17.k to hit $52K is much more advantageous than taking a $100K salary an minimizing your social security and medicare. Lets do the math now.

maximize solo 401K distribution
That is 38K that you pay social security for 17K (since we reach our $117K cap) and medicare for 38K.
(17K * 12.4%) + (38K * 2.9%) = $2108.00 taxes paid
vs
38K *25% * 25% = $2375 taxes saved.
which is a difference of $267 bucks

not to mention you have an extra 9.5K in a tax advantaged account that grows tax free and more than likely withdrawn at close to 0% retirement.
Now if you are at a 39.6% bracket that number is even more significant.
On the other hand if he makes his salary 80K those numbers are in favor against maximizing solo401K. It all depends on what he does.

-Beck
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adam123
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Re: Making $175k/year. What do I do with it all?

Post by adam123 »

Someone likely knows more about this than I do, but, if he wants kids one day, couldn't he open a 529 now naming a relative minor as a beneficiary, start putting up to $14k in per year, and then when he has his own child convert the beneficiary designee to his own child? That way he has an additional outlet for tax advantaged investment opportunities now.
john94549
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Re: Making $175k/year. What do I do with it all?

Post by john94549 »

I'd hire a good CPA, for starters. Then, I'd max out all the clearly legitimate tax-deferred strategies noted in this thread and avoid any questionable artifices (check with your CPA). After covering living expenses, invest the remainder in tax-free investments (a muni mutual fund comes to mind) or a plain, old, garden-variety, taxable savings account. Build a healthy emergency fund, save for "stuff", you know, things folks used to do. Pay off the car lease. If you have more money than you know what to do with, why are you leasing? Have you paid off the school loans? Are you now debt-free?
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kite
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Re: Making $175k/year. What do I do with it all?

Post by kite »

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john94549
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Re: Making $175k/year. What do I do with it all?

Post by john94549 »

Kite, get a CPA recommendation from the CFO of your company, or from a trusted friend. My CPA doesn't advocate any particular investment(s). He just crunches numbers. That said, he does know the Tax Code, and the inner workings of the IRS (he's a former IRS agent). Much cheaper than a tax attorney.
MooreBonds
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Re: Making $175k/year. What do I do with it all?

Post by MooreBonds »

Beckmaster wrote: Lastly, if you have a home office, a company car to go from home office to business office, any business related travel, etc these are all tax deductible business expenses that you don't get if you are not self employed.
Don't overlook this benefit - the IRS gives you 100% legal and reasonable expenses that you can legitimately deduct against your revenue as self-employed expenses.

You are allowed to declare a "home base" (most self-employed people with just themselves as an employee use their house). Then, ANY business travel from your house to the office, jobsite, airport, etc. (for business purposes) is a deductible expense at the current IRS mileage rate (I believe $.555/mile), unless you choose to keep gas receipts and depreciate your car as an alternate expense method. Plus you are allowed to write off dedicated business use of part of your home that you declare to be for business use, health insurance premiums, and other bonafide expenses.

However, if you do go to a 1099 employee, then the company you work for should definitely boost your hourly rate, since they are no longer paying benefits (health insurance, vacation, unemployment insurance, employer's share of FICA, etc.). Overall, you should come out at least a little bit ahead after it's all said and done after-taxes, due to your presumably lower benefits costs for yourself, and an ability to deduct expenses as a self-employed individual.

Personally, I would look at simply working as a self-employed individual (with perhaps an LLC). You don't have to pay unemployment insurance, and it might be a little simpler at setting up and maintaining. And as others have mentioned, definitely have either a solo 401(k) or a SEP IRA if self-employed, to increase ways to reduce taxable income now and possibly withdraw later at lower tax rates when you retire and can manage your taxable income more.
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cowboyinasia
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Re: Making $175k/year. What do I do with it all?

Post by cowboyinasia »

Since you have recently earned a big bump in salary, try to keep living off your old salary and invest the difference. Unless you muck it up, the funds start piling up.

While it's not fun to pay taxes, you (usually) pay taxes when you are making money. If you are really really set on paying as little tax as possible, consider investing in rental real estate. It allows for depreciation on the unit which reduces your tax. Years on if you sell to reinvest, you can 1031 and avoid the taxman. And you could set up a simple corporation or LLC (this part I'm not knowledgable on) and play with that concept.
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kramer
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Re: Making $175k/year. What do I do with it all?

Post by kramer »

cowboyinasia wrote: While it's not fun to pay taxes, you (usually) pay taxes when you are making money. If you are really really set on paying as little tax as possible, consider investing in rental real estate. It allows for depreciation on the unit which reduces your tax. Years on if you sell to reinvest, you can 1031 and avoid the taxman. And you could set up a simple corporation or LLC (this part I'm not knowledgable on) and play with that concept.
Someone more knowledgeable than I can comment, but I thought that annual depreciation on personally owned rental real estate could only be taken for folks whose annual income is $150,000 or less, with the phase out beginning at $100,000. Although maybe there are ways around this with LLC ownership.
Saving$
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Re: Making $175k/year. What do I do with it all?

Post by Saving$ »

MooreBonds wrote:
Beckmaster wrote: Lastly, if you have a home office, a company car to go from home office to business office, any business related travel, etc these are all tax deductible business expenses that you don't get if you are not self employed.
Don't overlook this benefit - the IRS gives you 100% legal and reasonable expenses that you can legitimately deduct against your revenue as self-employed expenses.

You are allowed to declare a "home base" (most self-employed people with just themselves as an employee use their house). Then, ANY business travel from your house to the office, jobsite, airport, etc. (for business purposes) is a deductible expense at the current IRS mileage rate (I believe $.555/mile), unless you choose to keep gas receipts and depreciate your car as an alternate expense method. Plus you are allowed to write off dedicated business use of part of your home that you declare to be for business use, health insurance premiums, and other bonafide expenses.
When I researched this, I seem to recall an exception clause to the effect that if my consulting assignment anticipated me traveling to the same project site every day for longer than 6 months, I could not deduct that travel/commuting. There was also a clarification that if the assignment was originally anticipated to be less than 6 months, but stretched longer, I could deduct a max of one year of commuting, and not any more.
SeattleCPA
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Re: Making $175k/year. What do I do with it all?

Post by SeattleCPA »

kite wrote:...What are shareholder distributions taxed at?
Typically, shareholder distributions aren't actually taxed. Rather, it's your share of the profits that are taxed. (This is called a distributive share.) And your share of the profits is taxed based on what sort of income makes up the profit. E.g., if it's ordinary income (from a business say) it's taxed as ordinary income. If it was capital gain generating the profits, it'd be taxed as capital gain.
kite wrote:I've thought about getting a CPA but I'm not sure what I should expect from them or if I should trust them. Aren't they kinda like stock broker advisors in the sense they're just going to try and steer me towards a direction which profits their motives? (No offense intended SeattleCPA :) )
I would say that CPAs are like stock brokers in same sense that your doctor and dentist, a lawyer, etc. are... Oh, and like you are when you provide services to your employer... or (if you set up your business) like you will be when you're a consultant. :D
chocolatemuffin
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Re: Making $175k/year. What do I do with it all?

Post by chocolatemuffin »

kite wrote:You guys have given me a lot to think about regarding going S/C corp or just staying how I am. It's quite standard in my industry to see people going contractor basis or stay employed by a people-farm company... I don't think I'd run into any trouble with the IRS regarding the switch... but I'll have to recalculate things again with the profit dividends no longer being taxed like I thought they would be. I'll redo all my spreadsheets tomorrow and post what my new plan could be.
I am not sure about your career situation, but are you sure it's a good career move to being a contractor? I have been doing software development in the Silicon Valley for over 10 years. My observation is that contractors are brought in to handle specific project for a specific duration. Their duties and deliverable would need to be clearly specified in the contract. If the company wants to a contractor to work indefinitely at the company and contribute to the company in a more general way (e.g. have the flexibility of taking on additional duties at a moment's notice), then the contractor would need to be brought on as an employee. I don't think contractors are suppose to have a career path at the company (e.g. promotions). Also, contractors also wouldn't get benefits such as stock options.

Basically, I think it would be a terrible idea to switch from employee to contractors just to save on taxes, if it ends up hurting your still early career.
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NightOwl
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Re: Making $175k/year. What do I do with it all?

Post by NightOwl »

mike_slc wrote:
kite wrote:Several people have commented on the S-Corp idea, for and against. I've researched this quite a lot and I believe this is the scenario I would pursue. My current company hires me back as a 1099 contractor and pays my corporation.
Not to rain on your parade but what you are describing is illegal. Speaking as someone who was an employee and a contractor and is now a business owner that employs employees and contractors, your company can't just switch you from W2 to 1099 so that you can both avoid paying FICA taxes. There are strict guidelines for what constitutes an employee (W2) and what constitutes a contractor (1099) and the IRS has gotten increasingly more strict with enforcing this over the years. Many larger companies have entire departments dedicated to maintaining compliance with these standards. The fact that you are now classified as a W2 means you are going to have an especially hard time justifying your switch to 1099 without making some fairly dramatic changes in the nature of your relationship with your employer.

http://www.irs.gov/Help-&-Resources/Too ... tractors-1
I am not very knowledgeable about this issue, but mike_slc's post matches my experience. Lots of people who work for my employer used to opt for 1099 rather than W2 status. Now HR won't let us do that because of stricter IRS guidelines -- as I understand it, if you get a large percentage of your "contracting" work from a single source, you aren't considered a contractor but rather an employee.

NightOwl
"Volatility provokes the constant dread that some investors know more than we do, making us fearful of ignoring such powerful price movements." | Peter Bernstein, "The 60/40 Solution."
Agrippa
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Re: Making $175k/year. What do I do with it all?

Post by Agrippa »

OP,

First, congratulations on earning such a high salary. You are well positioned for the future.

Second, it's my understanding that you already earn more money than you know what to do with. Therefore, I would strongly encourage you to avoid any questionable tax maneuvers in an effort to hide every last penny from the government. Work hard, save aggressively, give generously, and focus your efforts on pursuits that will enhance your quality of life. Income maximization is a means to an end, not an end in itself.

Best of luck!
Agrippa
Atilla
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Re: Making $175k/year. What do I do with it all?

Post by Atilla »

My advice is probably out of the mainstream on this board - but you should seriously consider giving a considerable chunk of your paycheck away every time you get it. Start at $1,500 a month and see how it goes. I ain't jokin.

It will reduce the amount you flush down the tax toilet (make sure you can deduct it all) while letting you not obsess about money. When you can let it slip through your fingers and give it to people less fortunate - financial crap bothers you a lot less.

And you'll still have plenty left to pay for living expenses and saving for the future.

The taxes though at that income level with no real deductions - been there and done that. Bugs the hell out of me.
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kite
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Re: Making $175k/year. What do I do with it all?

Post by kite »

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Last edited by kite on Fri Feb 02, 2018 6:46 pm, edited 1 time in total.
dekecarver
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Re: Making $175k/year. What do I do with it all?

Post by dekecarver »

Can you set up and run a charitable foundation and pay yourself an administrative salary to offset the tax situation? That way you can choose who to benefit and pay yourself while doing so. Seems like a win win if legally doable.
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