Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

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captmccrae
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Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by captmccrae »

I have max'd out tax-advantaged accounts and have some extra $$$ to invest.

I do not have a Taxable Brokerage account yet. Likely to open one soon.

Unique situation whereby our income is low for tax purposes and we have qualified for EIC in past. We'd love for that to continue, it's a nice credit. Taxable account, though, will boost my AIG with dividends if I'm not careful.

So what's best?

BTW, I'm not looking to sell and trade often. Likely just buy a stock index fund and hold in taxable.

I'n not a dividend expert at all, but back of envelope w/ some guessing ... say I buy 200 shares of VTSAX in taxable ($12k worth or so). Dividends quarterly at .35/share as guestimate. That'd be $280 in dividends that add to my AIG, right?

Thanks in advance for help!
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captmccrae
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by captmccrae »

BTW, those dividends would also count as investment income I believe. Only allowed $3650 of investment income. Anything more and can't claim credit.

So dividends in taxable are going to hurt me w/ AGI and investment income calculation.
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Kenkat
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by Kenkat »

Something like Total Stock Market Index is going to be a good choice as it pays very little out in dividends and capital gains typically. There are also a few tax managed funds that Vanguard offers that might also work.
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by mnnice »

Berkshire Hathaway :wink:
Makefile
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by Makefile »

In his last book one of the reasons John Bogle listed for Growth Index Fund (https://investor.vanguard.com/mutual-fu ... file/VIGAX) is accumulators who want less taxable dividend income.

If you are keeping a total market fund portfolio, then that fund will tilt you a toward growth stocks, and you might want to hold Value Index Fund in a tax-advantaged account to offset it. You might use Portfolio X-ray or a similar tool to figure out in what proportion you should hold them.

As others mention, you could consider individual non-dividend paying stocks, but that's obviously much more risky.

You could also consider a Series I Savings Bond for tax-deferred interest, if, on a second look, you think your emergency fund could use a boost (note that you can't redeem the bond for the first year).
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Flobes
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by Flobes »

I-Bonds.
petulant
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by petulant »

It really depends on the specific numbers. If not too large, holding a stock fund in taxable will be fine. If larger, municipal bonds in taxable (so long as they don't cause a problem with EIC--not sure) and stocks in tax-advantaged would be better. Worth checking.
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by grabiner »

petulant wrote: Tue Mar 24, 2020 12:56 pm It really depends on the specific numbers. If not too large, holding a stock fund in taxable will be fine. If larger, municipal bonds in taxable (so long as they don't cause a problem with EIC--not sure) and stocks in tax-advantaged would be better. Worth checking.
According to Publication 596, Earned Income Credit, tax-exempt interest does count as investment income for EIC. Tax-exempt bonds may still be useful for taxpayers in the phase-out of the earned income credit, because the marginal tax rate in that range is very high.

The limit for 2020 is $3650, which would be a diversified stock portfolio of about $200K. Unless you expect to have that large a taxable account, you don't need to worry too much about the limit. (But use index funds or ETFs; you don't want a mutual fund distributing a capital gain to put you over the limit.)
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captmccrae
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by captmccrae »

grabiner wrote: Tue Mar 24, 2020 2:45 pm [
The limit for 2020 is $3650, which would be a diversified stock portfolio of about $200K. Unless you expect to have that large a taxable account, you don't need to worry too much about the limit.
We have an emergency fund of about $60k in cash. I know most think that's excessive, and may well be. The interest on that (cash is laddered in CDs) sticks with us about $2k in interest income. That's over half-way there to the EIC limit. Of course, CD rates are going down and as some mature I won't be able to get the 3% or so I was getting.

The taxable portfolio is cash on top of that $60k that we have. Some good fortune lately and just doing well w/ our jobs.

If it comes down to it, maybe I should lower that emergency cash holding some. The EIC is such a nice deal for us.
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teen persuasion
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by teen persuasion »

Can you find other places to "invest" that money? HSA? Pay down mortgage or other debt? 529 accounts? Mega backdoor Roth?

We've qualified for EITC for quite a while (5 kids, getting down to just one at home and another in college) and it is sizeable, especially when the state matches at another 30%. We have little in taxable, because it's a risk to become ineligible if investment income pushes you over the threshold, and because we generally still have room in tax advantaged accounts somewhere (especially now over age 50). The one stock we had in taxable generated unwanted investment income a few years ago due to a takeover with new stock issued and some cash per share. Luckily it was under the limit.
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captmccrae
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by captmccrae »

teen persuasion wrote: Tue Mar 24, 2020 9:16 pm Can you find other places to "invest" that money? HSA? Pay down mortgage or other debt? 529 accounts? Mega backdoor Roth?
I wish I could do a backdoor Roth, but not eligible. We are blessed to have no debt.

Adding a little extra than normal to 529 is a good idea, thanks.
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by grabiner »

captmccrae wrote: Wed Mar 25, 2020 8:40 am
teen persuasion wrote: Tue Mar 24, 2020 9:16 pm Can you find other places to "invest" that money? HSA? Pay down mortgage or other debt? 529 accounts? Mega backdoor Roth?
I wish I could do a backdoor Roth, but not eligible. We are blessed to have no debt.
If you are eligible for the EIC, you should be under the limit for direct contributions to a Roth IRA (or even a traditional deductible IRA if you need to lower your adjusted gross income to qualify for a larger EIC).
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captmccrae
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by captmccrae »

grabiner wrote: Wed Mar 25, 2020 9:23 am

If you are eligible for the EIC, you should be under the limit for direct contributions to a Roth IRA (or even a traditional deductible IRA if you need to lower your adjusted gross income to qualify for a larger EIC).
I'm sorry, I don't totally understand what you're saying here, especially in regard to direct contributions to a Roth IRA. It's me and my lack of knowledge, certainly not you. Here's a little more info on me:

*Wife and I both teach. We contribute max to state 401k and 457b. I've checked with my state's plan (NC) and can't make additional after-tax contributions, so that's no Mega Back Door Roth (I think that's how it works).

*We both also max out Roth IRAs at Vanguard.

As I type this, maybe your point was to contribute to a traditional IRA and then deduct that amount from AGI (instead of a Roth). We are both covered by retirement plans and I recall that is an IRS issue, will have to research to see if in fact those IRA contributions would be deductible on 1040. Our 2019 AGI was 44k.

Goal is to invest this extra money as wisely as possible, especially for tax purposes and still getting EIC. A good problem to have but still trickier than I thought it'd be so far!

Thanks again for help.
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teen persuasion
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by teen persuasion »

grabiner wrote: Wed Mar 25, 2020 9:23 am
captmccrae wrote: Wed Mar 25, 2020 8:40 am
teen persuasion wrote: Tue Mar 24, 2020 9:16 pm Can you find other places to "invest" that money? HSA? Pay down mortgage or other debt? 529 accounts? Mega backdoor Roth?
I wish I could do a backdoor Roth, but not eligible. We are blessed to have no debt.
If you are eligible for the EIC, you should be under the limit for direct contributions to a Roth IRA (or even a traditional deductible IRA if you need to lower your adjusted gross income to qualify for a larger EIC).
I believe the OP has said elsewhere that they are already maxing Roth IRAs.

Using traditional IRA contributions to lower AGI for larger EITC would only be useful to the point AGI = w2 wages, since EITC tests on both. Traditional IRA contributions could offset investment income, but probably not useful beyond that unless you have some other nonwage income. In our case, DH's eligible for the teacher's credit, negating any interest and dividend income we might earn, so we contribute 100% Roth in IRAs because there's no further benefit to traditional beyond employer's plan contributions.

ETA: and we were posting at the same time.
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grabiner
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by grabiner »

captmccrae wrote: Wed Mar 25, 2020 9:44 am
grabiner wrote: Wed Mar 25, 2020 9:23 am

If you are eligible for the EIC, you should be under the limit for direct contributions to a Roth IRA (or even a traditional deductible IRA if you need to lower your adjusted gross income to qualify for a larger EIC).
I'm sorry, I don't totally understand what you're saying here, especially in regard to direct contributions to a Roth IRA. It's me and my lack of knowledge, certainly not you. Here's a little more info on me:

*Wife and I both teach. We contribute max to state 401k and 457b. I've checked with my state's plan (NC) and can't make additional after-tax contributions, so that's no Mega Back Door Roth (I think that's how it works).

*We both also max out Roth IRAs at Vanguard.
In a followup post, you said, "I wish I could do a backdoor Roth, but not eligible." You are actually eligible but don't need to do it, so that was the basis of my comment. What I believe you meant was, "I wish I could do a mega backdoor Roth," which is a different strategy, and one which your employer might not allow.
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captmccrae
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by captmccrae »

grabiner wrote: Wed Mar 25, 2020 9:59 am

In a followup post, you said, "I wish I could do a backdoor Roth, but not eligible." You are actually eligible but don't need to do it, so that was the basis of my comment. What I believe you meant was, "I wish I could do a mega backdoor Roth," which is a different strategy, and one which your employer might not allow.
See, it was my fault and lack of knowledge. Not shocking! Thanks for clarifying.
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Re: Best Way to Get EIC While Also Having Substantial Money in Taxable Accts

Post by grabiner »

captmccrae wrote: Wed Mar 25, 2020 10:03 am
grabiner wrote: Wed Mar 25, 2020 9:59 am

In a followup post, you said, "I wish I could do a backdoor Roth, but not eligible." You are actually eligible but don't need to do it, so that was the basis of my comment. What I believe you meant was, "I wish I could do a mega backdoor Roth," which is a different strategy, and one which your employer might not allow.
See, it was my fault and lack of knowledge. Not shocking! Thanks for clarifying.
No problem. I don't think "mega backdoor Roth" is even a standard term among investors; it does come up specifically on the Bogleheads.
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