Did I miss any tax beneficial investments?

[countdrak]

Hello all! It is the end of the year and I am evaluating if I have missed any investments that can reduce my tax burden. We file jointly. Age: Me:39, Wife:38 with 2 kids.

Maxed out 401K for both of us for the year
Maxed out 529B (state benefit) + did some more
HSA account for me, max out
Backdoor Roth will max out for myself

Is there anything else I can do ? Is there a way for my wife to have her own HSA account if she gets health insurance through my job? She cannot do a backdoor Roth because we started a Traditional IRA for her that holds some money and I didn't want to pay tax and covert it. Anything else I can do? I also don't have the option of megaback door due to my 401K plan.

Any advice will be helpful. Thanks!

[HomeStretch]

Your spouse could rollover her traditional IRA into her 401k if it accepts rollovers in and has good low-cost fund choices. This would allow her to do a backdoor Roth without being subject to the pro rata rule.

If your spouse and/or family is covered by a HSA-eligible HDHP, you can increase your HSA contributions to the higher family limit. HSA contributions can be made to one or more accounts. Spouse would need to open her own HSA account in order to be able to make a age 55+ catchup contribution.

An I-Bond or EE-Bond purchase won’t lower your tax liability but the interest is tax-deferred which lowers your future tax liability.

[countdrak]

I realized I have been contributing the Family max to HSA, so there is no value in opening individual accounts! Appreciate your advice, what happens to the index funds in the traditional IRA when I convert to the 401K she has? Will they sell it and then I reinvest the funds in the 401K?

[HomeStretch]

... what happens to the index funds in the traditional IRA when I convert to the 401K she has? Will they sell it and then I reinvest the funds in the 401K?

Your spouse has to ask the 401k provider whether some or all of her IRA holdings will transfer in-kind. It’s possible the IRA holdings will transfer. But they may not transfer as 401k plans often have limited fund choices and/or use institutional funds. There are no tax consequences to selling all IRA holdings, transferring cash and reinvesting in the 401k. There is time out of market but that should be brief (weeks).

[livesoft]

Invest tax efficiently in a joint taxable account. I don't know if it is still true or not, but I think something like VEA / VMTGX actually has a negative tax cost to me since I claim the foreign tax credit for it and don't pay tax on the qualified dividends. That is, the FTC exceeds the tax I pay on the non-qualified dividends.

[wolf359]

Invest tax efficiently in a joint taxable account. I don't know if it is still true or not, but I think something like VEA / VMTGX actually has a negative tax cost to me since I claim the foreign tax credit for it and don't pay tax on the qualified dividends. That is, the FTC exceeds the tax I pay on the non-qualified dividends.

+1

Having a taxable account has several tax advantages:

1) You may be able to take advantage of tax loss harvesting if the market drops. You can use the losses to offset investment taxable gains. You may also be able to offset up to $3K of ordinary income per year (perhaps convert $3K of the traditional IRA balance if this occurs).

2) You may be able to take advantage of tax gain harvesting if your income drops.

3) You can access the funds in the taxable account without penalty if you need them before retirement age. This can help persevere your tax advantaged accounts.

4) If you take RMDs or conduct a Roth conversion in the future, this gives you funds that you can use to pay the taxes (without reducing the tax advantaged accounts more than required.)

[countdrak]

Thanks! We do have taxable account with substantial money invested in equities. Is there a ratio or % of how much to invest in taxable VS non-taxable accounts?

[livesoft]

Is there a ratio or % of how much to invest in taxable VS non-taxable accounts?

No, there is not.

[FiveK]

Thanks! We do have taxable account with substantial money invested in equities. Is there a ratio or % of how much to invest in taxable VS non-taxable accounts?

No, it's usually "put everything you can in tax-advantaged (traditional or Roth, as your situation indicates) and then put whatever is left over into taxable."

See Investment Order for more details.

[grabiner]

Invest tax efficiently in a joint taxable account. I don't know if it is still true or not, but I think something like VEA / VMTGX actually has a negative tax cost to me since I claim the foreign tax credit for it and don't pay tax on the qualified dividends. That is, the FTC exceeds the tax I pay on the non-qualified dividends.

This happens only if you are in the 12% federal tax bracket, pay little or no state tax, and are not in the phase-in of Social Security taxation. The tax cost on an international fund with 2/3 qualified dividends is 12% of the non-qualified 1/3, which is 4% of the dividend yield. The foreign tax credit is about 8%. Both the 4% and 8% are lower for Developed Markets Index (VEA/VTMGX).

If you are in the phase-in of Social Security taxation, you pay 6% or 10.2% tax on qualified dividends (depending on which part of the phase-in range you are in) and 18% or 22.2% tax on non-qualified dividends, so the tax cost is positive.

But even if you do pay tax on your tax-efficient investments, broad-market indexes such as Total Stock Market and Total International lose very little value to taxes, so they make good funds for a taxable account.