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If your gross income is six figures and soley from W-2s (mid to high $100s so assume traditional IRA contribution is phased out for pre-tax benefit) what tax planning tips do you have to lower the tax liability for married filing joint? So far, I've come up with maximize 401k at work, purchase home, have kids, contribute to charity. Any other advice would be greatly appreciated!!
Yes, contributions are fine but contributing to them doesn't help with lowering tax obligations. 401k is limited by the maximum percentage one is allowed to contribute but I don't think there is an income limit. I'm no expert but that is my understanding!
Yes, contributions are fine but contributing to them doesn't help with lowering tax obligations. 401k is limited by the maximum percentage one is allowed to contribute but I don't think there is an income limit. I'm no expert but that is my understanding!
In most cases, there is no income limit.
However, you can run into a situation where you are a highly compensated employee, then you will not be allowed to put any money in 401K.
Also, in some cases, company will also match 401k only up to a certain max salary and you need to plan accordingly to maximize the company match. Example: you get a nice bonus in Jan but company only matches x% - you will not be able to get the most out of the company for the year since Jan will cause much of your deposit to be unmatched. A workaround is to adjust your 401k dowm for the month the bonus occurs. Fidelity has calculators for these situations - maybe others do too.
Usually in above cases, you are also not eligible for IRAs due to income limits being exceeded.
But, if you are going to be 50+ in '09, you can have additional $5000 in catch-up contributions from your side over the 401k limit of $16,500 this year.
What is your tax bracket now? What is your tax bracket going to be when you retire? Chances are you will be in a higher tax bracket when you retire then you are now so why save taxes now? Why put money into a pre-tax account, vs saving taxes later in an after tax account?
If your gross income is six figures and soley from W-2s (mid to high $100s so assume traditional IRA contribution is phased out for pre-tax benefit) what tax planning tips do you have to lower the tax liability for married filing joint? So far, I've come up with maximize 401k at work, purchase home, have kids, contribute to charity. Any other advice would be greatly appreciated!!
Once you've maxed out your contributions to tax-sheltered accounts (401ks and IRAs), you can put the rest of your pre-tax money in municipal bonds and index funds. Municipal bonds are particularly advantageous the higher your tax bracket is. Index funds are low turnover by definition, they should minimize realizing capital gains.
Golfgal, my understanding is that people are usually in a lower tax bracket when they retire (I've got another 30, 35 years ... though ideally I'd like to retire in 20 years) because they're not "earning" money. Retired folks tend to be more on a fixed income whereas when you work, one has income growth potential. We're in the 28% bracket now and anticipate to be in the 33% for 2009. Hence, I'm trying to work my brain here on some tax saving strategies!
Golfgal, my understanding is that people are usually in a lower tax bracket when they retire (I've got another 30, 35 years ... though ideally I'd like to retire in 20 years) because they're not "earning" money. Retired folks tend to be more on a fixed income whereas when you work, one has income growth potential. We're in the 28% bracket now and anticipate to be in the 33% for 2009. Hence, I'm trying to work my brain here on some tax saving strategies!
If you have taxible investments then you will probably be in a higher tax bracket when you retire then when you are younger. I look at the deductions we have with 3 kids, I am a business owner so I have a lot of deductions, our mortgage, rental property, etc. and our effective tax rate is about 2%. I want my money going into accounts that grow tax free and distributions are not taxable, thus putting money into after tax accounts now. I am very excited for the Roth roll over coming up in 2010 since we can't contribute to that now.
If you are in the 33% bracket now, then yes, finding some ways to reduce your taxable income now is not a bad idea but when you are talking about $4000 into an IRA, is small amount you are saving on taxes now worth potentially having almost all of that money taxed when you retire? Keep in mind that Uncle Sam will get more of your IRA then you ever will so you will probably need twice as much then as you would with a non-taxable account.
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