Maximum Tax Deferral

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ThisDinosaur
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Maximum Tax Deferral

Post by ThisDinosaur » Mon Oct 29, 2018 12:59 pm

What is the most one could conceivably place into tax deferred accounts per year in the US? And how would someone set that up? I'm assuming business owners would have the maximum available combinations of options.

From what I can tell, it would be something like $91K/year for a married couple. A SEP IRA maxed out at $55K plus a spouse employed with a 401K with 100% match = $36K/year. If a couple co-own a business, could they conceivably both have a SEP IRA for the same business? Totalling $110 annually?

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UpsetRaptor
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Re: Maximum Tax Deferral

Post by UpsetRaptor » Mon Oct 29, 2018 1:24 pm

My spouse is a public school teacher and has access to:
403b: $18,500 limit now, +6000 when she reaches 50
457: $18,500 limit now, + $6000 when she reaches 50, + $18,500 when she's within 3 years of retirement
tIRA: $5,500

All told, that will be $73K space available just for her when the time comes, but it'll actually be more because, for example, all the $18,500 #s increase to $19K next year. I am not a teacher, but several of her colleagues are married to teachers (they met at work or at school in a teaching program), so that's all x2 for those couples. It can be tough for schoolteachers to fill up that space, but administrators/principals/superintendents also have access to all that, in many districts.

Edit: Or if a teacher is married to a high earner, then that could all be filled up.
Last edited by UpsetRaptor on Mon Oct 29, 2018 1:27 pm, edited 1 time in total.

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Misenplace
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Re: Maximum Tax Deferral

Post by Misenplace » Mon Oct 29, 2018 1:27 pm

Only if the business makes enough money to fill up the employer contribution.
Please see the Wiki on SEP and solo401k.
https://www.bogleheads.org/wiki/Solo_401(k)_plan
https://www.bogleheads.org/wiki/SEP

However, there are many other ways to put aside additional earnings tax deferred. Deferred compensation plans exist in the private sector which can often allow large amounts of deferral. Public sector deferred compensation plans (aka 457 plans) typically allow only lower amounts of deferral.

ThisDinosaur
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Re: Maximum Tax Deferral

Post by ThisDinosaur » Mon Oct 29, 2018 2:26 pm

Misenplace wrote:
Mon Oct 29, 2018 1:27 pm
However, there are many other ways to put aside additional earnings tax deferred. Deferred compensation plans exist in the private sector which can often allow large amounts of deferral.
What other ways?

Some employers offer a SERP, but those are assets of the company until paid out. Which is risky. Can a self employed business owner pay himself a SERP?

retiredjg
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Re: Maximum Tax Deferral

Post by retiredjg » Mon Oct 29, 2018 4:22 pm

I'm curious why a person would ask this question. It does not seem optimal to me to try to max this number above a reasonable amount.

SchruteB&B
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Re: Maximum Tax Deferral

Post by SchruteB&B » Mon Oct 29, 2018 4:27 pm

401(k)s can be as high as $55k per year with profit sharing.
Cash balance plan at spouse’s firm allows very large amounts to be deferred— I believe approximately $300k per year for those in their 60s.

Greenman72
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Re: Maximum Tax Deferral

Post by Greenman72 » Mon Oct 29, 2018 5:25 pm

Depending on how old you are and how much you make, you could contribute $200, 300, 400k to a cash balance plan or DBP.

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Misenplace
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Re: Maximum Tax Deferral

Post by Misenplace » Tue Oct 30, 2018 1:04 am

ThisDinosaur wrote:
Mon Oct 29, 2018 2:26 pm
Misenplace wrote:
Mon Oct 29, 2018 1:27 pm
However, there are many other ways to put aside additional earnings tax deferred. Deferred compensation plans exist in the private sector which can often allow large amounts of deferral.
What other ways?

Some employers offer a SERP, but those are assets of the company until paid out. Which is risky. Can a self employed business owner pay himself a SERP?
I have a SERP from my former MegaCorp employer, funded by matching corporate $ because I put quite a lot into their deferred compensation plan my last few years. It was a sweet deal, in retrospect. Although the SERP is mine, my deferred compensation is still at risk as I am a creditor of the company if they go belly up. I don't know if a self employed business owner can set up a DCP/SERP plan. My understanding is that it takes a lot of planning and legal work to set these up. Makes sense when you are a megacorp, and are trying to retain your top management. Although I may be naive and there could be off the shelf products for this that I don't know about. I suspect that economies of scale make a lot of difference and you need to be a pretty big company to make it worthwhile.

In the public sector, many employers offer a 457 plan, which allows you to put away, in addition, the same amount as a 401k or 403b. Once you retire, you can use your 457 funds if you are early retired, or roll them into your 403b/IRA accounts in which case you should not access them until you are 59.5.

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Misenplace
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Re: Maximum Tax Deferral

Post by Misenplace » Tue Oct 30, 2018 1:07 am

retiredjg wrote:
Mon Oct 29, 2018 4:22 pm
I'm curious why a person would ask this question. It does not seem optimal to me to try to max this number above a reasonable amount.
I agree. At some point, you can have too much in tax advantaged accounts, and face higher taxes once you have to take required min distributions (RMDs) at 70.5 years old.

NightFall
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Re: Maximum Tax Deferral

Post by NightFall » Tue Oct 30, 2018 7:08 am

Assumptions: married couple, both employed at a single job, under age 50.

Using government retirement accounts, the 415c limit is $55k this year per person. That doesn't matter where the money comes from in a 401k or a 403b. in addition, some employers offer 457's which are outside the 415c limit. You may also defer to an ira, which is deductible given income limitations. So I would say something like $74k/person. Most will not be able to max out all of these retirement options.

Spirit Rider
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Re: Maximum Tax Deferral

Post by Spirit Rider » Tue Oct 30, 2018 8:42 am

NightFall wrote:
Tue Oct 30, 2018 7:08 am
Using government retirement accounts, the 415c limit is $55k this year per person. That doesn't matter where the money comes from in a 401k or a 403b. in addition, some employers offer 457's which are outside the 415c limit.
Not exactly. The annual addition limit (2018 = $55K) is per person per unaffiliated employer.

So if you have more than one unaffiliated employer, you can contribute $55K to each one. That could be due to a job change, simultaneous employment and/or a SEP IRA/one-participant 401k. If you had primary W-2 employment and self-employment you could contribute $110K

However, 403b plans are unique in that they are considered controlled by the participant. This means you could work at one employer with a 401a/403b or 401k/403b combination and have $110k in annual additions. However, you must combine any 403b annual additions with the annual additions of any > 50% owned businesses.

I know someone who is eligible for 401a, 403b and 457b plans at his place of employment. The 401a/403b allow employee after-tax contributions and in-service rollovers. Not that they can afford to, but they could have $55K (401a) + $55K (403b) + $18.5K (457b) = $128.5K in contributions

Bacchus01
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Re: Maximum Tax Deferral

Post by Bacchus01 » Tue Oct 30, 2018 8:57 am

I have a NQ Deferred Comp plan. I can put up to 100% of bonus and 75% of base pay.

For 2019 that means I could put $515K. Plus $19K for 401K. Plus $7K for HSA. All told that's $541K. Plus employer match of $8500 on the 401K for a total of $550K.

Probably won't do that though. :happy

Bacchus01
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Re: Maximum Tax Deferral

Post by Bacchus01 » Tue Oct 30, 2018 8:58 am

Misenplace wrote:
Tue Oct 30, 2018 1:07 am
retiredjg wrote:
Mon Oct 29, 2018 4:22 pm
I'm curious why a person would ask this question. It does not seem optimal to me to try to max this number above a reasonable amount.
I agree. At some point, you can have too much in tax advantaged accounts, and face higher taxes once you have to take required min distributions (RMDs) at 70.5 years old.
Or, retire early and do ROTH conversions for many years up to the threshold. Delay SS to 70 and have no RMDs.

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willthrill81
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Re: Maximum Tax Deferral

Post by willthrill81 » Tue Oct 30, 2018 10:24 am

My 401a (mandatory and employer contributions) is about $19.5k right now. I also have a 457 plan, so that's another $18.5k, and the HSA is $6.9k. We could contribute to TIRAs as well, and that's $11k (we actually contribute to Roth IRAs). So the total space is $74.4k. We're not maxing that out yet though.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

ThisDinosaur
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Re: Maximum Tax Deferral

Post by ThisDinosaur » Tue Oct 30, 2018 3:41 pm

Misenplace wrote:
Tue Oct 30, 2018 1:07 am
retiredjg wrote:
Mon Oct 29, 2018 4:22 pm
I'm curious why a person would ask this question. It does not seem optimal to me to try to max this number above a reasonable amount.
I agree. At some point, you can have too much in tax advantaged accounts, and face higher taxes once you have to take required min distributions (RMDs) at 70.5 years old.
The RMD schedule seems pretty reasonable. At age 70, you have to take out about 3.5%. At age 90, you have to take out about 10%. Assuming a SWR between 3 and 4 %, I dont see a problem here.

Part of the reason I'd want to do this is for asset creditor protection. 401Ks are [reasonably] protected from lawsuits. Other "retirement" vehicles are somewhat protected as well because the state has an interest in preventing the appearance of a lot of destitute, unemployable geriatrics.

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willthrill81
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Re: Maximum Tax Deferral

Post by willthrill81 » Tue Oct 30, 2018 3:45 pm

ThisDinosaur wrote:
Tue Oct 30, 2018 3:41 pm
Misenplace wrote:
Tue Oct 30, 2018 1:07 am
retiredjg wrote:
Mon Oct 29, 2018 4:22 pm
I'm curious why a person would ask this question. It does not seem optimal to me to try to max this number above a reasonable amount.
I agree. At some point, you can have too much in tax advantaged accounts, and face higher taxes once you have to take required min distributions (RMDs) at 70.5 years old.
The RMD schedule seems pretty reasonable. At age 70, you have to take out about 3.5%. At age 90, you have to take out about 10%. Assuming a SWR between 3 and 4 %, I dont see a problem here.
Indeed. RMDs are not the bugaboo that many believe they are. Even though you are not required to spend your RMDs, merely withdraw them, only spending your RMDs is a very conservative withdrawal method.

RMDs only represent a first-world problem for those who have been egregious 'oversavers' for a long period of time, don't need to spend their RMDs, and want to leave behind a substantial bequest. Generally, the best solution is to do Roth conversions while you can. That's my strategy.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Broken Man 1999
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Re: Maximum Tax Deferral

Post by Broken Man 1999 » Tue Oct 30, 2018 3:58 pm

I used a Vanguard annuity to greatly expand my tax deferred investment opportunity when my income stream turned into unearned income. All I could stash in traditional accounts were the small amounts for a spousal Roth IRA.

It was not much different than a 401k plan that had high (for Vanuard) ERs.

Worked very well for me. The amount today is triple my original amount invested.

As Taylor has said, there are many roads to Dublin.

I wouldn't have used any other annuity, however, only Vanguard.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

ThisDinosaur
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Re: Maximum Tax Deferral

Post by ThisDinosaur » Tue Oct 30, 2018 5:20 pm

Broken Man 1999 wrote:
Tue Oct 30, 2018 3:58 pm
I used a Vanguard annuity to greatly expand my tax deferred investment opportunity when my income stream turned into unearned income.
I've looked at vanguard's annuity options a number of times, but never pulled the trigger. As far as I can tell, the insurance company's fees are at least equal to taxes saved.

Broken Man 1999
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Re: Maximum Tax Deferral

Post by Broken Man 1999 » Tue Oct 30, 2018 6:21 pm

ThisDinosaur wrote:
Tue Oct 30, 2018 5:20 pm
Broken Man 1999 wrote:
Tue Oct 30, 2018 3:58 pm
I used a Vanguard annuity to greatly expand my tax deferred investment opportunity when my income stream turned into unearned income.
I've looked at vanguard's annuity options a number of times, but never pulled the trigger. As far as I can tell, the insurance company's fees are at least equal to taxes saved.
From Vanguard website:
No commissions
You buy a Vanguard Variable Annuity directly from us so you pay no commissions or purchase fees. And there are no surrender charges if you change your mind later.


AND

§Source: Morningstar, Inc., as of December 2017. The Vanguard Variable Annuity has an average expense ratio of 0.50%, versus the annuity industry average of 2.24%—excludes fees for optional riders. Actual expense ratios for the Vanguard Variable Annuity range from 0.38% to 0.67%, depending on the investment allocation. The expense ratio includes an administrative fee of 0.10% and a mortality and expense risk fee of 0.17%. The expense ratio excludes additional fees that would apply if the Return of Premium death benefit rider or Secure Income (Guaranteed Lifetime Withdrawal Benefit) rider is elected. In addition, contracts with balances under $25,000 are subject to a $25 annual maintenance fee.

I actually used insurance money, and some of my injury award, neither of which was taxed to begin with. My GUL (group universal life) I had from MegaCorp had a clause that if you could not do some ADLs (activities of daily living) you could take 50% of the face value of the policy at the rate of 2% per month. With all the money coming in, I wanted some way for it to grow tax-deferred, so it was an easy choice to make for me. And, in many states annuities are protected from creditors. When you lose the ability to earn a living, you try to make sure you can hold on to what you have.

Given the "free money" (OK, I did have to be injured to get the "seed" money, so I wouldn't recommend my route :D ) I didn't think the higher ER of the sub-accounts was that big a deal. And, Vanguard just reduced one of the fees a tiny bit.

In short, when I no longer had the ability to invest in my 401k at MegaCorp as my income was from SSDI and LTD benefits from MetLife, I thought a Vanguard deferred annuity gave me a good opportunity to grow money tax deferred.

All in I paid $65,500 into the annuity, it is now worth between $195,000 and $200,000, depending on the crazy market right now.

Lots of flexibility to get the money out, as well.

Vanguard annuities are much different than those pitched by the various insurance companies, in terms of costs, and flexibility of distribution strategies.

Sure, if I had been able to use my 401k, I would have. But, getting lemons, I made lemonade.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

Nate79
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Re: Maximum Tax Deferral

Post by Nate79 » Tue Oct 30, 2018 8:12 pm

Don't forget Ibonds and EEbonds as unconventional tax deferred space.

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UpsetRaptor
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Re: Maximum Tax Deferral

Post by UpsetRaptor » Wed Oct 31, 2018 9:42 am

willthrill81 wrote:
Tue Oct 30, 2018 3:45 pm
ThisDinosaur wrote:
Tue Oct 30, 2018 3:41 pm
Misenplace wrote:
Tue Oct 30, 2018 1:07 am
retiredjg wrote:
Mon Oct 29, 2018 4:22 pm
I'm curious why a person would ask this question. It does not seem optimal to me to try to max this number above a reasonable amount.
I agree. At some point, you can have too much in tax advantaged accounts, and face higher taxes once you have to take required min distributions (RMDs) at 70.5 years old.
The RMD schedule seems pretty reasonable. At age 70, you have to take out about 3.5%. At age 90, you have to take out about 10%. Assuming a SWR between 3 and 4 %, I dont see a problem here.
Indeed. RMDs are not the bugaboo that many believe they are. Even though you are not required to spend your RMDs, merely withdraw them, only spending your RMDs is a very conservative withdrawal method.

RMDs only represent a first-world problem for those who have been egregious 'oversavers' for a long period of time, don't need to spend their RMDs, and want to leave behind a substantial bequest. Generally, the best solution is to do Roth conversions while you can. That's my strategy.
I totally agree. If I end up with the "problem" of having RMDs in large excess of my expenses when I'm 70.5 and older, I'll just consider the game won, tax bite aside. With the excess, I could start bequeathing to my heirs early via 529s or gift up to exclusion, I could donate, or I could just re-invest in taxable. My choice, game's won.

BarbBrooklyn
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Re: Maximum Tax Deferral

Post by BarbBrooklyn » Wed Oct 31, 2018 9:55 am

In a 457 plan, you can do an additional catch up if you've underutilized that account in the previous years. It's called DAR, deferral acceleration for retirement.
BarbBrooklyn | "The enemy of a good plan is the dream of a perfect plan."

ThisDinosaur
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Re: Maximum Tax Deferral

Post by ThisDinosaur » Sat Nov 03, 2018 12:54 pm

So far it looks like the answer is $127,900 per year.

That's with a couple who co own a business and have a HDHP. They could each put up to $55,000 per year into a SEP IRA, and $5,500 each into an After Tax IRA. Plus $6,900 for the family into an HSA.

Of course, the family business would have to make at least $440,000, split equally between spouses, for them both to max out their own SEP IRA. If earnings are less than that, a 401K with 100% company match ($37,000) for one or both spouses is an alternative.
(37)×2+(5.5)×2+6.9= $91.9k

Are my assumptions above accurate? Is there any way to do better?

Seems like the Vanguard Variable Annuity is the only way to expand tax advantage / creditor protected space any faster. And the reinsurance cap on that is (I think) $250k.

Spirit Rider
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Re: Maximum Tax Deferral

Post by Spirit Rider » Sat Nov 03, 2018 1:28 pm

ThisDinosaur wrote:
Sat Nov 03, 2018 12:54 pm
Are my assumptions above accurate? Is there any way to do better?
A one-participant 401k is a much better way to do this. They each can make an employee elective contribution (2018/2019 = $18.5K/$19K + $6K catch-up >= age 50) and then a maximum non-elective employer contribution = 20% of net self-employment earnings (business profit - 1/2 SE tax)

For 2019 this would would only require them each to have net self-employment earnings of $56K - $19K = $37K / 20% = $185K for a total of $370K.

ThisDinosaur
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Re: Maximum Tax Deferral

Post by ThisDinosaur » Mon Nov 05, 2018 8:04 am

Spirit Rider wrote:
Sat Nov 03, 2018 1:28 pm
ThisDinosaur wrote:
Sat Nov 03, 2018 12:54 pm
Are my assumptions above accurate? Is there any way to do better?
A one-participant 401k is a much better way to do this. They each can make an employee elective contribution (2018/2019 = $18.5K/$19K + $6K catch-up >= age 50) and then a maximum non-elective employer contribution = 20% of net self-employment earnings (business profit - 1/2 SE tax)

For 2019 this would would only require them each to have net self-employment earnings of $56K - $19K = $37K / 20% = $185K for a total of $370K.
Good call, Spirit Rider. The double 401(k) + 20% is a much better approach.

(55K)×2+(6K)×2+7K= $129K

Assuming combined income of at least $370K split evenly between the couple.

Any other ways to expand tax deferred space?

MathIsMyWayr
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Re: Maximum Tax Deferral

Post by MathIsMyWayr » Mon Nov 05, 2018 9:33 am

UpsetRaptor wrote:
Mon Oct 29, 2018 1:24 pm
My spouse is a public school teacher and has access to:
403b: $18,500 limit now, +6000 when she reaches 50
457: $18,500 limit now, + $6000 when she reaches 50, + $18,500 when she's within 3 years of retirement
tIRA: $5,500
For 457, you may choose only one catch-up, but not both, $6,000 or a special 3-year catch-up up to $18,500, when/if you are eligible. In 2018, the max is: ($18,500+$6,000) + ($18,500+$18,500) +$6,500 = $68,000. It will take a big chunk from your pay, and you may need another source of income to put away all these. However, it will be a big help for those who realize that they are late.
403(b) also has $3,000 catch-up in the 15 year rule.

ThisDinosaur
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Re: Maximum Tax Deferral

Post by ThisDinosaur » Mon Nov 05, 2018 10:02 am

https://www.efile.com/ira-401k-maximum- ... ns-limits/
401, 403, 457, SEP plans and any combination of them seem to cap out at $55K per person per year. And your ability to cap them out is dependent on your employer and whoever manages their plan.

That's why small business owners and incorporated contractors are in the best position, since they can set up the plan however they want.
Greenman72 wrote:
Mon Oct 29, 2018 5:25 pm
Depending on how old you are and how much you make, you could contribute $200, 300, 400k to a cash balance plan or DBP.
This could be a good idea. What else do you know about them? It seems like its kind of like a SERP, but you *have* to pay into it the same amount every year and the return is limited to the Long Term Treasury rate. Is that correct?

Aside from the Variable Annuity, what else is there for employed individuals to expand tax advantage space who dont have the max out option with their employer's plan?

Greenman72
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Re: Maximum Tax Deferral

Post by Greenman72 » Mon Nov 05, 2018 7:44 pm

Basically, the amount that you can contribute is actuarially calculated based on your age, income, and the plan payout. But basically, the older you are and the more you make, the more you can contribute. A 65-year old can contribute ~$275k to a cash balance plan. Once you've fully funded the plan (and have $2.6m in the plan), then you roll it over into an IRA.

Here's a calculator that you can use to determine the maximum that you can put into a cash balance plan.
https://www.cashbalancedesign.com/resou ... ors-tools/

The return is not limited to treasury rates, but the "hypothetical balance" is usually based off of treasuries. So, assume you're 60 years old, and you contribute $200k to the plan (and the assumed RoR is 5%). Your "hypothetical balance" at the end of one year is $210k. Then you add another $200k, and your hypothetical is $430k.

The "actual" rate of return varies with your investments. So if you contribute $200k and your investment return is 20%, then you will have a plan that is overfunded by $30k, so next year, the amount that you can contribute next year will be reduced by $30k.

Eventually, after a few years, you get to $2.6m, and you can't contribute anymore. So you roll it over into an IRA and the game is over.

In order to have such a plan, you'll have to get a third-party administrator, who will do annual testing and actuarial analysis. Because these things are costly to administer, you need to plan on paying 3-4 grand a year to have the plan. For that reason, I don't normally recommend these to people who are younger than 50, because the cost of the plan is too high relative to the amount of tax savings.

(Before somebody comes in and gets all technical--please note that all this is waaaaay oversimplified. This is just a general "how stuff works" example.)

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jharkin
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Re: Maximum Tax Deferral

Post by jharkin » Tue Nov 06, 2018 11:05 am

Lots of ways these numbers can be high. We are a dual income couple - I work in tech, my wife in a public school.

If you consider both tax deferred, and tax free (roth), we can theoretically use:

Me:
HSA: 6900 (my contributions plus 1k match)
401k: 55k (I can contribute 18500 pretax, then I get a 6% match, and then I can contribute post tax with roth conversion up to the IRS limit)
Roth IRA: 5500

Spouse:
403b: 18500 (no matching)
457b: 18500 (no matching)
Roth IRA: 5500

So all told that's $109,900 if we could afford to fill it all. My spouse also has a pension plan that they take out about 6k/yr pretax for, so call it $115,900. Once we hit 50 all the catch up contributions kick in adding another $21k for a total of $136,900 (and thats not including future limit increases).

If both spouses where high income professionals in careers that offered matching, after tax contributions and multiple plans (i.e. xxx + 457s) I think its possible to go over 55k per person and run the numbers up even higher?

ktip
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Re: Maximum Tax Deferral

Post by ktip » Wed Nov 07, 2018 6:02 pm

401, 403, 457, SEP plans and any combination of them seem to cap out at $55K per person per year.
As in Spirit Rider's example earlier, the $55k per year isn't on a combination of these (if I read you correctly re: what you mean by any combination of them). If one has the right plan, the 401, 403b, and 457b can have these separate caps:

55k on 401a -- this could all be tax deferred if all employer contributions, e.g., employer contributes a nice percentage of salary and income is high; or could have employee post-tax contributions and backdoor

55k on 403b -- 18.5k could be tax deferred employee contribution, and rest could be post-tax and then backdoor; employers can usually also contribute pre-tax but not sure if there are rules/ limits connected to employer contributions to 401a?

18.5k on 457b -- all tax deferred employee contribution

Plus could have:

5.5k IRA

3.5k HSA

So 137k per person.

https://thefinancebuff.com/401a-plan-co ... limit.html

My partner and I both have all of these accounts, but I don't think we have the after-tax contribution options, and definitely not the income to make it relevant.

james22
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Re: Maximum Tax Deferral

Post by james22 » Thu Nov 08, 2018 7:11 am

There's no limit to the amount I can put in Berkshire every year.
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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