better? Lowering taxable income to 12%, go below 63k to collect Savers credit, or max all Roths

[Powerfultools]

Hi all,

My spouse and I are in a position this year and for several years to come, able to invest in his and her traditional or Roth 403bs, his and her traditional 457bs, his and her traditional or Roth IRAs, and his SEPIRA.

For 2018, my spouse and I combined have the money to invest 37k in 403b, 37k in 457b, 11k in IRA and ~3k in SEPIRA.

If I choose to invest 37k in Roth 403b, 37k in traditional 457b, 11k in Roth IRA and ~3k in SEPIRA, my taxable income will about 80k, putting us in 22% bracket.

If keep everything the same as above, but choose to contribute $2,700 in Traditional IRA instead (the rest -$8,300 in Roth) we should be below $77,400 taxable income, putting us in 12% bracket.

I can also adjust both of our 403b accounts to contribute towards traditional instead of Roth. I can successfully do this and bring our taxable income below 63k and qualify for Savers credit of $400 and Land us in the 12% bracket.

We will qualify for full $6,000 child tax credit (3) for all of above scenarios.

Which if of the above is best choice in your opinion? Or is there a different way you would do it? Thank you!

[retiredjg]

Tough question.

I would not contribute that much to traditional accounts for many years because I believe you can end up with too much in tax-deferral. It might be OK for a few years, but if your income is likely to go up, I'd do a lot of tax-deferral later (at higher tax rates) and do more Roth now.

If I were a low earner, getting $400 in saver's credit would be a lot. I'm not sure it is a significant amount for you. I'd probably skip that and put more in Roth.

The SEP IRA and traditional IRAs will eventually get in the way of using the back door to contribute to Roth if that is in your plans.

You seem to have a better than average understanding of how taxes work. That will serve you well.

[MathWizard]

I would go with the ROTHs.

[MoneyMarathon]

Which if of the above is best choice in your opinion?

There is some simple math that can help put the $400 credit in perspective.

You'd have to get down to $63k from $77.4k, a difference of $14.4k. Consider the $14.4k income to be taxed $400, as this is basically what is happening, in the form of a lost credit. You don't actually get the exact 12% marginal tax rate until you get down below $63k in income. Since 400 / 14400 = 0.0277, your marginal tax rate on the $14.4k of income (considered as a lump sum...) is 14.78%. So you can make the decision regarding whether it's better to put income taxed at 14.78% in the Roth or non-Roth space.

I'd say go for Roth. Specifically:

If keep everything the same as above, but choose to contribute $2,700 in Traditional IRA instead (the rest -$8,300 in Roth) we should be below $77,400 taxable income, putting us in 12% bracket.

There's very little risk of losing much (on the opportunity to save on taxes) when paying 14.78% tax for Roth.

See also:

https://www.bogleheads.org/wiki/Traditional_versus_Roth

[FiveK]

...help put the $400 credit in perspective.

+1 to that post. Picture version below.

As already noted, using the 22% marginal saving rate for traditional is a reasonable bet, but the 12% (plus a little bump from the saver's credit) might better be paid now and post-tax amount put into Roth.

If your income were a bit lower and the Earned Income Credit came into play, it might be a different conclusion. See the personal finance toolbox spreadsheet if you want to plug in more exact numbers. Note that, unlike the assumption made to generate the chart below, for the EIC it matters whether the contribution is to an IRA or to a 401k/403b/457.

[Powerfultools]

Which if of the above is best choice in your opinion?

There is some simple math that can help put the $400 credit in perspective.

You'd have to get down to $63k from $77.4k, a difference of $14.4k. Consider the $14.4k income to be taxed $400, as this is basically what is happening, in the form of a lost credit. You don't actually get the exact 12% marginal tax rate until you get down below $63k in income. Since 400 / 14400 = 0.0277, your marginal tax rate on the $14.4k of income (considered as a lump sum...) is 14.78%. So you can make the decision regarding whether it's better to put income taxed at 14.78% in the Roth or non-Roth space.

I'd say go for Roth. Specifically:

If keep everything the same as above, but choose to contribute $2,700 in Traditional IRA instead (the rest -$8,300 in Roth) we should be below $77,400 taxable income, putting us in 12% bracket.

There's very little risk of losing much (on the opportunity to save on taxes) when paying 14.78% tax for Roth.

See also:

https://www.bogleheads.org/wiki/Traditional_versus_Roth

Awesome way to explain it. I can easily make a decision with this approach. Thank you!

[Powerfultools]

...help put the $400 credit in perspective.

+1 to that post. Picture version below.

As already noted, using the 22% marginal saving rate for traditional is a reasonable bet, but the 12% (plus a little bump from the saver's credit) might better be paid now and post-tax amount put into Roth.

If your income were a bit lower and the Earned Income Credit came into play, it might be a different conclusion. See the personal finance toolbox spreadsheet if you want to plug in more exact numbers. Note that, unlike the assumption made to generate the chart below, for the EIC it matters whether the contribution is to an IRA or to a 401k/403b/457.

Regarding EIC, yes, I was close in 2017.

In 2018, if I would have change from Roth to Traditional on both 403bs, I could have lowered taxable income into the 30s, but I need to get a better grip on value of EIC vs Roth and have a better understanding how to use the spreadsheet you linked. The loss of personal and dependent exemptions (5) vs new higher standard deduction MFJ affects me negatively and increases my taxable income making EIC appear less rewarding.

[Katietsu]

Do you expect to have a defined benefit pension when you retire? Do you expect to have a significant income increase in the future? If the answer to these questions is No, then I would put more money into the traditional/tax deferred plans.

[FiveK]

In 2018, if I would have change from Roth to Traditional on both 403bs, I could have lowered taxable income into the 30s, but I need to get a better grip on value of EIC vs Roth and have a better understanding how to use the spreadsheet you linked. The loss of personal and dependent exemptions (5) vs new higher standard deduction MFJ affects me negatively and increases my taxable income making EIC appear less rewarding.

With only W-2 income, you'd have to get 1040 line 7 down below ~$49K to qualify for the EIC. With ~$144K gross, that's unlikely.

Taken as a whole, however, it appears the new tax law does not affect you negatively. Instead, using the first set of choices given in the original post for this thread, you'll pay ~$3200 less federal income tax in 2018 than you would have in 2017. Is that what you see also?

[teen persuasion]

...help put the $400 credit in perspective.

+1 to that post. Picture version below.

As already noted, using the 22% marginal saving rate for traditional is a reasonable bet, but the 12% (plus a little bump from the saver's credit) might better be paid now and post-tax amount put into Roth.

If your income were a bit lower and the Earned Income Credit came into play, it might be a different conclusion. See the personal finance toolbox spreadsheet if you want to plug in more exact numbers. Note that, unlike the assumption made to generate the chart below, for the EIC it matters whether the contribution is to an IRA or to a 401k/403b/457.

Regarding EIC, yes, I was close in 2017.

In 2018, if I would have change from Roth to Traditional on both 403bs, I could have lowered taxable income into the 30s, but I need to get a better grip on value of EIC vs Roth and have a better understanding how to use the spreadsheet you linked. The loss of personal and dependent exemptions (5) vs new higher standard deduction MFJ affects me negatively and increases my taxable income making EIC appear less rewarding.

When I first read your post, I thought you might benefit from traditional contributions to be eligible for EITC. I subtracted $37k from your mentioned $80k, and looked up $43k with 3 kids in the EITC chart to get $2697.

Reading more carefully, I see that you are using taxable income, not AGI. EITC is calculated on AGI and line 7 wages. Adding back the $24k new MFJ standard deduction, it appears you can't get into EITC range at all : $104k - $37k = $67k AGI.

IRAs won't help for EITC, because of the test on line 7 wages, which are unaffected by IRAs.

[Powerfultools]

Do you expect to have a defined benefit pension when you retire? Do you expect to have a significant income increase in the future? If the answer to these questions is No, then I would put more money into the traditional/tax deferred plans.

Hi Katietsu,

Both, my spouse and I expect to receive defined benefit pensions (teachers-public-Texas). We do not pay into social security. Unfortunately, in our careers, we do not expect any type of significant income increases. I (45yo) will be eligible to retire in 8 years. My spouse (42yo) will be eligible to retire in 12 years. Whether we continue teaching or move into the private sector after we reach eligibility is a tough question to answer. 10 plus years is very far away and we expect lots of changes in public education financing.

[Powerfultools]

In 2018, if I would have change from Roth to Traditional on both 403bs, I could have lowered taxable income into the 30s, but I need to get a better grip on value of EIC vs Roth and have a better understanding how to use the spreadsheet you linked. The loss of personal and dependent exemptions (5) vs new higher standard deduction MFJ affects me negatively and increases my taxable income making EIC appear less rewarding.

With only W-2 income, you'd have to get 1040 line 7 down below ~$49K to qualify for the EIC. With ~$144K gross, that's unlikely.

Taken as a whole, however, it appears the new tax law does not affect you negatively. Instead, using the first set of choices given in the original post for this thread, you'll pay ~$3200 less federal income tax in 2018 than you would have in 2017. Is that what you see also?

Hi FiveK,

I agree with you. That’s what I see. I will pay less federal income tax in 2018. The expected lower tax bill for the next 7 years has me trying to figure what is the best plan of action. I can’t imagine paying any less tax going forward -bracket wise (never say never..).

Our numbers for 2017-

His W2- Box 1 (wages)- $29,158
Box 5 (Medicare wages) - $64,975.25
Traditional 457b-18k
Traditional 403b-12.3k
Roth 403b- 5.7k

Her W2- Box 1 (wages)- $13,376
Box 5- (Medicare wages)- $54,262
Traditional 457b-18k
Traditional 403b-16k
Roth 403b- 2k

In addition, my spouse and I fully funded Roth IRAs in 2017.

I did have additional income from side work in 2017. After expenses and SEPIRA contribution, I profited 17k. But the side work is not guaranteed year in year out. So far in 2018, I have made roughly 6k in profit (estimating). I expect to double that by the end of the year.

It’s too late too fully fund both 18.5k traditional 403bs, since we started contributing to Roth at the being of year, but I can change between Roth and traditional anytime. But I am trying to understand all my options and the pros and cons using the new tax reform, if not for 2018 if it’s too late, for 2019 and beyond, as long as the ride last. Our W2 is consistent, and I have flexibility on whether to fund Roth or traditional in 403bs as well as IRAs.

I understand TCJA works in my favor overall, but I believe it effects EITC negatively in my case. I guess I can’t have my cake and eat it too.

I really appreciate everyone taking time to review my information. I am open to all ideas. Thanks Bogleheads members!

[MrBeaver]

Another thing to consider is any potential capital gains that you expect in 2018.

It is not often accounted for, but if the following are true:

• The earned income portion of your taxable income is below $77,400
• Capital gains are greater than zero, and cause your total taxable income to be above $77,200

Then your true marginal tax rate is 27%, because each additional earned income dollar taxed at 12% also causes a capital gains dollar to be taxed at 15% instead of 0%. This remains true at lower brackets also (10%/12% threshold) for a 25% marginal rate, but that is more common for semi-retirees who are liquidating taxable accounts to supplement wage income.

Therefore, if you can estimate your capital gains and make some 3Q/4Q adjustments or control your realized capital gains at the end of the year, it can be beneficial to avoid this 'phantom' bracket. Especially if you are contributing to ROTHs, as it is easy at this level to think you are paying 12% marginal rate on income directed to ROTHs when in fact it is much higher because of capital gains.

[Powerfultools]

...help put the $400 credit in perspective.

+1 to that post. Picture version below.

As already noted, using the 22% marginal saving rate for traditional is a reasonable bet, but the 12% (plus a little bump from the saver's credit) might better be paid now and post-tax amount put into Roth.

If your income were a bit lower and the Earned Income Credit came into play, it might be a different conclusion. See the personal finance toolbox spreadsheet if you want to plug in more exact numbers. Note that, unlike the assumption made to generate the chart below, for the EIC it matters whether the contribution is to an IRA or to a 401k/403b/457.

Regarding EIC, yes, I was close in 2017.

In 2018, if I would have change from Roth to Traditional on both 403bs, I could have lowered taxable income into the 30s, but I need to get a better grip on value of EIC vs Roth and have a better understanding how to use the spreadsheet you linked. The loss of personal and dependent exemptions (5) vs new higher standard deduction MFJ affects me negatively and increases my taxable income making EIC appear less rewarding.

When I first read your post, I thought you might benefit from traditional contributions to be eligible for EITC. I subtracted $37k from your mentioned $80k, and looked up $43k with 3 kids in the EITC chart to get $2697.

Reading more carefully, I see that you are using taxable income, not AGI. EITC is calculated on AGI and line 7 wages. Adding back the $24k new MFJ standard deduction, it appears you can't get into EITC range at all : $104k - $37k = $67k AGI.

IRAs won't help for EITC, because of the test on line 7 wages, which are unaffected by IRAs.

Hi teen persuasion.

Maybe I am calculating something wrong. I am no expert by any means with taxation.

Our numbers for 2017-

His W2- Box 1 (wages)- $29,158
Box 5 (Medicare wages) - $64,975.25
Traditional 457b-18k
Traditional 403b-12.3k
Roth 403b- 5.7k

Her W2- Box 1 (wages)- $13,376
Box 5- (Medicare wages)- $54,262
Traditional 457b-18k
Traditional 403b-16k
Roth 403b- 2k

In addition, my spouse and I fully funded Roth IRAs in 2017.

I did have additional income from side work in 2017. After expenses and SEPIRA contribution, I profited 17k. But the side work is not guaranteed year in year out. So far in 2018, I have made roughly 6k in profit (estimating). I expect to double that by the end of the year.

Does the information above help/change calculations?

[FiveK]

Our numbers for 2017-

His W2- Box 1 (wages)- $29,158
Box 5 (Medicare wages) - $64,975.25
Traditional 457b-18k
Traditional 403b-12.3k
Roth 403b- 5.7k

Her W2- Box 1 (wages)- $13,376
Box 5- (Medicare wages)- $54,262
Traditional 457b-18k
Traditional 403b-16k
Roth 403b- 2k

Usually Box 5 minus traditional 401k&403b&457b equals Box 1. One common exception is a mandatory pre-tax pension contribution. Is that your situation, or is there something else?

Your "gross earnings" (e.g., on a year-end pay stub) may exceed Box 5 by the amount of pre-tax medical insurance, FSA, HSA, etc.

[Powerfultools]

Our numbers for 2017-

His W2- Box 1 (wages)- $29,158
Box 5 (Medicare wages) - $64,975.25
Traditional 457b-18k
Traditional 403b-12.3k
Roth 403b- 5.7k

Her W2- Box 1 (wages)- $13,376
Box 5- (Medicare wages)- $54,262
Traditional 457b-18k
Traditional 403b-16k
Roth 403b- 2k

Usually Box 5 minus traditional 401k&403b&457b equals Box 1. One common exception is a mandatory pre-tax pension contribution. Is that your situation, or is there something else?

Your "gross earnings" (e.g., on a year-end pay stub) may exceed Box 5 by the amount of pre-tax medical insurance, FSA, HSA, etc.

Yes, the difference is mandatory pre-tax pension contribution for both of us. In addition, FSA medical of $2,600 for 2017, pre-tax medical insurance and pre-tax dental insurance. Thanks.

[FiveK]

Yes, the difference is mandatory pre-tax pension contribution for both of us. In addition, FSA medical of $2,600 for 2017, pre-tax medical insurance and pre-tax dental insurance. Thanks.

With the pension deduction, and "only" $12K in Schedule C income, you could reach EIC eligibility and 33.06% marginal tax saving rates - but that would take ~$63K of 403b&457b contributions, so the marginal rate on a full $74K of 403b&457b contributions would be ~17.6%.

Up to you to decide whether that 17.6% would be higher than your marginal rate in retirement. If so, go traditional now. If not, go Roth, at least for amounts above that needed to bring you out of the 22% bracket.

You could do 2018 tax planning in the "what if?" worksheets of TurboTax, TaxAct, etc. or the toolbox spreadsheet linked earlier.

[teen persuasion]

First question: do you have investment income > $3500? If so, you are ineligible for EITC.

If you might be eligible, look up the amounts on line 7 (wages) and your AGI in the EITC chart. I believe EITC is completely phased out at $54,884 wages/AGI for 3 kids in 2018. If both are under the phaseout cap, your EITC will be the lower of the two results. On this phaseout side of the chart, the lower your wages/AGI the higher the credit. You will have to see how the sidegig income affects your AGI.

https://www.irs.gov/credits-deductio ... ext-year

[FiveK]

First question: do you have investment income > $3500? If so, you are ineligible for EITC.

Good point. TurboTax et al. and the toolbox spreadsheet will all account for that (assuming one enters the interest, dividends, etc.).

[Powerfultools]

First question: do you have investment income > $3500? If so, you are ineligible for EITC.
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No, I do not have investment income yearly greater than $3500. I currently do not have investment income. Just taxable interest around $1,000 yearly (edited to correct response).

[MrBeaver]

No, I do not have investment income yearly greater than $3,500. I generally have around $1,000 yearly.

See my reply above about the 'phantom' 27% tax bracket. If you have CapGains or Qualified Dividends and taxable income above 77,200, you are effectively paying 27% tax on that equivalent amount of earned income. In your case, this is $270. I would at least put enough in traditional so that your taxable income is below the 0% capital gains tax (77,200). The decision is then between that and putting a lot more in traditional to get $400 from the savers credit.

Essentially, your effective marginal tax rates after accounting for savers credit like MoneyMarathon did if you fill to the top of these brackets look like:

19k to 63k: 12% (ignoring effect of saver's credit as getting to the other savers credit tiers is likely not feasible)
63k to 77.2k: 14.8% (because of foregone saver's credit)
77.2k to 77.4k: 27% (because of capital gains going from 0 to 15% and 12% regular income rate)
77.4k to 78.2k: 27% (because of capital gains going from 0 to 15% and 12% regular income rate after doing CapGains worksheet which considers CapGains and earned income separately)
78.2k+: 22%

[Powerfultools]

No, I do not have investment income yearly greater than $3,500. I generally have around $1,000 yearly.

See my reply above about the 'phantom' 27% tax bracket. If you have CapGains or Qualified Dividends and taxable income above 77,200, you are effectively paying 27% tax on that equivalent amount of earned income. In your case, this is $270. I would at least put enough in traditional so that your taxable income is below the 0% capital gains tax (77,200). The decision is then between that and putting a lot more in traditional to get $400 from the savers credit.

Essentially, your effective marginal tax rates after accounting for savers credit like MoneyMarathon did if you fill to the top of these brackets look like:

19k to 63k: 12% (ignoring effect of saver's credit as getting to the other savers credit tiers is likely not feasible)
63k to 77.2k: 14.8% (because of foregone saver's credit)
77.2k to 77.4k: 27% (because of capital gains going from 0 to 15% and 12% regular income rate)
77.4k to 78.2k: 27% (because of capital gains going from 0 to 15% and 12% regular income rate after doing CapGains worksheet which considers CapGains and earned income separately)
78.2k+: 22%

I misunderstood earlier, I had $1,000 in taxable interest, not capital gains. Sorry.

[MrBeaver]

I misunderstood earlier, I had $1,000 in taxable interest, not capital gains. Sorry.

Ah, ok then. Never mind, it's not applicable to that except to make sure you take that income into account in addition to your earned income if you are trying to split Roth/traditional to hit get below a particular threshold (e.g. 77.4k 12% bracket).

[Powerfultools]

No, I do not have investment income yearly greater than $3,500. I generally have around $1,000 yearly.

See my reply above about the 'phantom' 27% tax bracket. If you have CapGains or Qualified Dividends and taxable income above 77,200, you are effectively paying 27% tax on that equivalent amount of earned income. In your case, this is $270. I would at least put enough in traditional so that your taxable income is below the 0% capital gains tax (77,200). The decision is then between that and putting a lot more in traditional to get $400 from the savers credit.

Essentially, your effective marginal tax rates after accounting for savers credit like MoneyMarathon did if you fill to the top of these brackets look like:

19k to 63k: 12% (ignoring effect of saver's credit as getting to the other savers credit tiers is likely not feasible)
63k to 77.2k: 14.8% (because of foregone saver's credit)
77.2k to 77.4k: 27% (because of capital gains going from 0 to 15% and 12% regular income rate)
77.4k to 78.2k: 27% (because of capital gains going from 0 to 15% and 12% regular income rate after doing CapGains worksheet which considers CapGains and earned income separately)
78.2k+: 22%

I misunderstood earlier, I had $1,000 in taxable interest, not capital gains. Sorry.

Thank you, MrBeaver. This is great information. I was caught in this couple years ago. I learned. my lesson the hard way. I am learning every year what not to do. I hope by asking questions I can avoid some future mistakes. I don’t have anyone in my immediate family that has an idea how taxes work or how to save effectively. So you guys are my financial family. Thank you all. I owe so much to this board.

[Powerfultools]

First question: do you have investment income > $3500? If so, you are ineligible for EITC.

Good point. TurboTax et al. and the toolbox spreadsheet will all account for that (assuming one enters the interest, dividends, etc.).

Hi, I am using toolbox spreadsheet (AWESOME!!!) and I entered all the information except for SEP IRA. Is there an entry forSEP IRA? If not, how would one manipulate the spreadsheet or is there a workaround? Thanks in advance.

[happymob]

I'd go with Roth as well to the top of the 12% bracket, unless you have other tax credit considerations, such as the Premium Tax Credit.

[FiveK]

Hi, I am using toolbox spreadsheet (AWESOME!!!) and I entered all the information except for SEP IRA. Is there an entry forSEP IRA? If not, how would one manipulate the spreadsheet or is there a workaround? Thanks in advance.

You could include the SEP amount along with any deductible tIRA contributions in row 48.

The Instructions tab mentions "No check is made to enforce compliance with the various IRS rules on IRA, 401k, HSA, etc. contributions" and I believe that is correct.

[mnnice]

Slightly OT, but what kind of RMDs are the OP going to have?

[Powerfultools]

Slightly OT, but what kind of RMDs are the OP going to have?

I don’t even know how to answer this. I am newbie. I can provide numbers if someone wants to help walk me through the calculations. Thanks.

[mnnice]

Roughly 3.75% of the balance needs to be taxed at 70 1/2. The amount increases as you age.

You might be okay as you could retire early and pay taxes on the 457 money much sooner. Just part of the big picture

[Powerfultools]

Newbie question. My spouse and I do not pay into social security on W2. Using the toolbox spreadsheet, I see SS calculations on income. How does this play into marginal and cumulative tax rate numbers? I am trying understand the role of marginal and cumulative, and what my real goal is with all this information. Thanks in advance. I feel like I opened a can of worms. I have lots more to learn.

[FiveK]

Newbie question. My spouse and I do not pay into social security on W2. Using the toolbox spreadsheet, I see SS calculations on income. How does this play into marginal and cumulative tax rate numbers?

Perhaps the easiest thing is to edit those cells and add *0 at the end (or just delete the SS tax calculation completely).

I am trying understand the role of marginal and cumulative, and what my real goal is with all this information. Thanks in advance. I feel like I opened a can of worms. I have lots more to learn.

See Marginal Vs Effective Tax Rates And When To Use Each for a good overview.

In short, for your personal financial decisions, always use marginal.

Unfortunately, "marginal" can be an ambiguous word because when one calculates the marginal tax rate due to "something" using (change in tax) divided by (dollar amount of "something"), the dollar amount in the denominator is important.

Sometimes it is straightforward. E.g., take the graph in viewtopic.php?p=3881482#p3881482. For the first $40K of 4xxb contributions, you save 22% on each dollar. Thus the dollar-by-dollar marginal rate (i.e., the change in tax for every single dollar) is the same as the marginal rate for the whole $40K, 22%.

After that first $40K, the marginal tax saving rate drops to 12%. That might be the point at which you say "it was worth 22% to use traditional, but at 12% it isn't, so we will use Roth for contributions above $40K."

Sometimes it is not so straightforward. The difference of $0.01 (e.g., $0.49 that rounds down to $), vs. $0.50 that rounds up to $1) can cause the $400 saver's credit change. That's a marginal rate of $400/$0.01 = 40000%. But, as MoneyMarathon described, you don't get that $400 until you have already contributed ~$38K at a 12% rate. This is where the cumulative curve comes into play: it shows the marginal rate based on (change in tax) divided by (all the dollars to that point). This allows you to put the $400 in context. Does that make sense?