Preparing for future unbalanced income

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BlueRidgeHorizon
Posts: 9
Joined: Tue May 15, 2018 7:31 am

Preparing for future unbalanced income

Post by BlueRidgeHorizon » Tue May 15, 2018 7:47 am

Hello, I would like some advice regarding my future household income. I will try to keep it to the point.

My wife will soon graduate a medical program and her pay will be much higher than mine.
My salary will basically be nullified by federal income taxes alone.

How do others deal with this situation?

Do I have any options? Would it be crazy to not withdraw any taxes until year end from my salary and invest?

What types of investments would be suggested for this approach? Do I have many options?
I would like to try and create a diverse financial portfolio which can help offset the risk of a crashed market, while potentially
offsetting the future loss in taxes. I am in my early 30's and I am not afraid to take a few risks at this stage.

delamer
Posts: 6100
Joined: Tue Feb 08, 2011 6:13 pm

Re: Preparing for future unbalanced income

Post by delamer » Tue May 15, 2018 10:31 am

If you don’t pay income taxes throughout the year, you risk getting penalized for underpayment when you file your return. And any investment income you get will be minimal since you would need an investment that does not risk principal (since you’ll need the money to pay taxes).

Your best bet is to maximize both your and your wife’s tax-advantaged investments like 401(k)s, IRAs, HSAs, etc. in order to reduce your taxable income.

Read the Bogleheads wiki on “lazy portfolios” for specific investment suggestions.

EDIT: Also suggest you check this website out — https://www.whitecoatinvestor.com

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Preparing for future unbalanced income

Post by dbr » Wed May 16, 2018 8:50 am

I don't understand. The two of you are now going to be able to earn a large income and you call it a "situation."

A good source if information is to go here and start learning: https://www.bogleheads.org/wiki/Getting_started

I don't know why you think that people that get to earn a lot of money should not also pay some taxes. It certainly is not helpful to your mindset to imagine that all "your" income is going to pay "her" taxes.

BlueRidgeHorizon
Posts: 9
Joined: Tue May 15, 2018 7:31 am

Re: Preparing for future unbalanced income

Post by BlueRidgeHorizon » Wed May 16, 2018 9:12 am

Hello, that is not my mindset at all. I am concerned about the massive tax increase. I have self direct roth iras and roth 401k's in place for both of us which are about 5 years old now. Unfortunately when she starts working they will no longer be eligible for pre tax deductions.

What gets me the most is the opportunity cost of the taxes that the government will hold all year interest free, I know I can do alot with that money, in the stock market alone I could at least generate a 25% return which I have been doing with personal savings for years. I was just curious if anyone has some other strategies, I am pretty well versed in finance and retirement and have an education in business administration. I see the typical generic strategic suggestions all over the place but Im always curious to hear about new things.

BlueRidgeHorizon
Posts: 9
Joined: Tue May 15, 2018 7:31 am

Re: Preparing for future unbalanced income

Post by BlueRidgeHorizon » Wed May 16, 2018 9:15 am

delamer wrote:
Tue May 15, 2018 10:31 am
If you don’t pay income taxes throughout the year, you risk getting penalized for underpayment when you file your return. And any investment income you get will be minimal since you would need an investment that does not risk principal (since you’ll need the money to pay taxes).

Your best bet is to maximize both your and your wife’s tax-advantaged investments like 401(k)s, IRAs, HSAs, etc. in order to reduce your taxable income.

Read the Bogleheads wiki on “lazy portfolios” for specific investment suggestions.

EDIT: Also suggest you check this website out — https://www.whitecoatinvestor.com
This is interesting information. I was not aware of under payment rules, this is new terminology for me. https://www.hrblock.com/tax-center/irs/ ... mated-tax/ Im going to discuss this with my CPA and see if I can come up with a good strategy. I like to do my homework before going in there and paying his hrly rate.

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greg24
Posts: 3229
Joined: Tue Feb 20, 2007 10:34 am

Re: Preparing for future unbalanced income

Post by greg24 » Wed May 16, 2018 10:05 am

BlueRidgeHorizon wrote:
Wed May 16, 2018 9:12 am
in the stock market alone I could at least generate a 25% return which I have been doing with personal savings for years.
You need to reset your expectations.

My best advice to you is to put as much as possible into your 401k/403bs. That is the easiest and most effective way for you to avoid taxation.

DarthSage
Posts: 225
Joined: Tue Sep 19, 2017 9:39 am

Re: Preparing for future unbalanced income

Post by DarthSage » Wed May 16, 2018 12:02 pm

Penalties for under-withholding are a real thing, sorry to say. On the good side, so long as you (and your spouse) withhold more this year than last year, you should be okay. You may owe a lot, but you shouldn't be penalized.

I'll mention something that happened to us, just because I never saw it coming:

MIL died suddenly last July. She hadn't taken her RMDs for 2017.
DH and BIL take RMDs for her in 2017, splitting the proceeds 50/50. We had taxes withheld at 20%. DH also did a Roth conversion in 2017.
April 15th, we have a huge, painful tax bill.
The worst part? Our state (NC) decided that we owed them SO MUCH tax for 2017, they required us to pre-pay a big chunk for 2018. Never mind that the Roth conversion was a one-time thing, and DH's RMDs will be much smaller than his mom's was, because his life expectancy is longer.

My point is, changing circumstances can make taxes even more miserable than they already are. It's in your best interest to educate yourself. And although I personally HATE loaning Uncle Sam a dime more than I have to, it might be worthwhile for you to go high on your withholding for a year or two, until you settle into your new normal and can accurately estimate what you owe. On April 15th, you'd rather be saying, "Crap, I'm getting a lot back", than, "Crap, I owe $14,000!"

NotWhoYouThink
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Joined: Fri Dec 26, 2014 4:19 pm

Re: Preparing for future unbalanced income

Post by NotWhoYouThink » Wed May 16, 2018 1:24 pm

I second the recommendation to start here https://www.bogleheads.org/wiki/Getting_started, and also to check out the White Coat Investor site.

But even before that, just get used to the fact of life that people with high earned income pay a lot of taxes. You can take advantage of 401k and HSA, but the US tax system is progressive, and higher income leads to more taxes. It's generally advisable to have the right amount withheld during the year, and as your household income changes you may need a few adjustments to get it right. The first year of high income is easy, because as mentioned above you just need to withhold more than your total tax bill from the previous year. After that you have to get closer to the target.

Once your income rises and your after-tax accounts start generating dividends, then you can start signaling your income by complaining at parties about the NIIT.

Dottie57
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Joined: Thu May 19, 2016 5:43 pm

Re: Preparing for future unbalanced income

Post by Dottie57 » Wed May 16, 2018 4:10 pm

greg24 wrote:
Wed May 16, 2018 10:05 am
BlueRidgeHorizon wrote:
Wed May 16, 2018 9:12 am
in the stock market alone I could at least generate a 25% return which I have been doing with personal savings for years.
You need to reset your expectations.

My best advice to you is to put as much as possible into your 401k/403bs. That is the easiest and most effective way for you to avoid taxation.
And put the money into tax deductible portion of the accounts. Stop paying taxes on the money.

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