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Fed tax credit eligibility - who typically doesnt get it?

Fed tax credit eligibility - who typically doesnt get it?

My accountant will verify that, but I heard someone saying that married couples making $300K/year and no children would be the type of profile who would not benefit from the fed tax credit.

Is that true?

I always thought it is more like how much you have paid in fed income tax.

np86 | 2017年11月15日

@burdogg Thanks for explaining that. I definitely did not know that was possible and if you have the means it seems like an excellent, cost effective way of setting your child up for their (way into the) future retirement. I'm definitely going to be looking into this in a few years.

andy.connor.e | 2017年11月15日

I see it as making the investment now, to get the car that im going to use for a long time. Then in 6 years, i'll have zero debt and i can save every penny i make. Presumably, i will be making more money in 6 years than i am now so i can save EVEN more. Im planning for "late game".

burdogg | 2017年11月15日

andy.connor.e - You know you and your finances, etc... :)

I will share this - it is very common for people to say what you have said though. As the raises come, they end up spending it on other things they want, and continue to push off the saving. Then all of a sudden, they are 45-50 and have yet to really save much of anything and have lost the huge value of time.

Again, not saying this is you, just putting it out there for others who don't realize this is the vicious cycle we get into. There is always "tomorrow" when things will be better and I can do X because of Y. :) Last, I am not saying don't buy this car - it is an amazing thing to drive :)

andy.connor.e | 2017年11月15日

Definitely true.

Rutrow | 2017年11月15日

You should listen to my parenting advice because my opinions have not been clouded by actually having children of my own...

But I always thought that a portion of a kids first dollar should be set aside for retirement. 2%? 5%? I don't know how much, the amount isn't as important as the idea that retirement savings should become habit from the very start.

andy.connor.e | 2017年11月15日

I look at it like this. 5% of 10k is only $500. You could save 5% per year and save $10k after 20 years. I look at when the right time to start saving is. @Rutrow thats a good thing to teach so kids learn. Once you get rid of your debt, you can allocate all of that which would have been spent on a mortgage or car loan, put directly into savings - as if you never stopped paying your loans off, and then additionally put in whatever you dont spend at the end of the month.

For me, all new income from today moving forward gets saved, not spent. Every thousand dollars saved is like being able to retire another month earlier.

Rocky_H | 2017年11月15日

Here's another example of a child's Roth IRA at an even younger age. This is also a Dave Ramsey story. A family had a baby who got to be a baby model in a diaper commercial, so the kid had earned income of a few thousand dollars. They had to file an income tax return for the baby to document the income, but then they got to put it into a Roth IRA for the kid at 1 year old or whatever. That's a long time for compounding!

andy.connor.e | 2017年11月15日

It will never keep up with inflation.

NumberOne | 2017年11月15日

While this is a little off topic, it is still an excellent discussion. Another way to save a little from taxes, at least in the future is by a 529 college plan. Options for that include a prepaid plan for specific states, or an investment type account that can be used anywhere in the U.S. With 529 accounts, the money can be managed in such a way that it will most likely beat both inflation, and potential tuition hikes. IRAs on the other hand can be treated like individual investment accounts, and they beauty of the Roth is that you can grow the account exponentially, and never worry about taxes that will come out if it because the tax was paid when the money was put into the account. I really do not understand the logic some people have in saying regular IRAs are better, because of a minor deduction (since it is limited by your max contribution.) The benefit of tax free growth far exceeds the cost of inflation and the benefit of immediate tax savings.

burdogg | 2017年11月15日

Wow Rocky_H, yes that is - and investing it will by far beat inflation :)

burdogg | 2017年11月15日

NumberOne - exactly - all my retirements are ROTH - that tax free growth and tax free distribution is going to be amazing - not to mention I am not forced to take certain amounts of distributions like traditional IRA's and 401k. I can take as little or as much as I want with ROTH :)

Carl Thompson | 2017年11月15日

@burdogg

But I thought Roth IRAs had the same really low contribution limits as any other IRA? How could you put enough in to your Roth that it would be enough to be a significant part of your retirement plan?

Rocky_H | 2017年11月15日

Ah, branching into other really interesting investment stuff. That training and teaching of financial classes is coming in handy.

@NumberOne, Most people go for 529 plans because they have heard of them. But slightly better than that is the ESA (Education Savings Account). It basically works about the same way as a 529—investments grow tax free as long as they are used for education expenses—but it has some more freedoms in use than 529 plans, since ESA is a national program and not state-limited. Also, an ESA is transferrable within the family, so if you have a first kid who decides they don’t want to go to college or just wants to get a two year associate’s degree or something, the account can transfer to another child in the family, or can be used by a parent who wants to go back to college.

@NumberOne, Quote: “I really do not understand the logic some people have in saying regular IRAs are better, because of a minor deduction (since it is limited by your max contribution.) The benefit of tax free growth far exceeds the cost of inflation and the benefit of immediate tax savings.”

Crunching the numbers can actually make this work out better for one or the other, depending on the situation, and it’s mainly based on what your tax rate is now versus in retirement. For the situation you’re thinking of, where someone gets started saving early, has a mid-level working income (tax rate) and they will have a really big nest egg at retirement, they would have a pretty heavy tax burden in retirement time from mandatory withdrawal levels. Roth works much better that way because their tax level would be higher later.

But for people with really high paying jobs during their working years (high tax rate), and they screwed around and didn’t really start saving for retirement early like they should, and they are going to have a pretty small nest egg to draw from in retirement, it’s the opposite, where they would be getting taxed heavily from their paychecks, but have so little income in retirement that they hardly have any tax bill then anyway. Traditional IRA would work better in that case to pay tax on it when their income is much lower.

@Carl Thompson, Quote: “But I thought Roth IRAs had the same really low contribution limits as any other IRA? How could you put enough in to your Roth that it would be enough to be a significant part of your retirement plan?”

Yes, that is right—Roth and traditional IRAs have the same contribution limits, but behind the scenes, you’re _effectively investing more. I think the limit is about $5,000 per year? So with a regular IRA, you put $5,000 in (gross pay), and then it will get taxed down from there later when it’s drawn out. To put $5,000 into a Roth, you have to gross about $6,000, get it taxed down to $5,000, and then all of that goes in and is not going to get reduced later. So that’s the one thing.

The other thing that makes this work is that they don’t seem to have limits on how much you can roll over from a traditional IRA to a Roth one. So you could put $5,000 in each kind, for a total of $10,000, and then the next year, pay the tax difference to roll the standard over into the Roth account, and you have a $10,000 Roth. It’s just a shell game of shuffling it around, but there is nothing at all shady or fraudulent about doing that.

That rollover thing has one other advantage. There are income limits that phase about the ability to contribute into Roths. So if you make too much, you’re not allowed to contribute into them. But there is no income on the rollovers. *eyeroll* So you just have to contribute into a traditional IRA each year, and then roll it into the Roth IRA the next year. It’s cumbersome and stupid, but that’s the legal way to do it to comply with the tax code.

burdogg | 2017年11月15日

So Carl - maybe you have not heard, but 401k's can have ROTH's as well. So I have a ROTH 401k wife and I, so stashing $37,000 or so a year in ROTH 401k, and some years able to also do ROTH IRA for both, another $10,000, bam, $47,000 a year in ROTH investments :)

Yep, ROTH for us, and our nice 2 Million nest egg will all be TAX FREE :)

burdogg | 2017年11月15日

Maybe we should get op to re-tittle this thread to Tax credit, and financial planning :)

burdogg | 2017年11月15日

I have been slammed with some taxes though doing everything ROTH, but in the end, it is worth it to me - to 1) gain all that investment and growth tax free 2) not have the government meddle with how much I have to withdraw and 3) who cares what taxes do when I retire ;)

Carl Thompson | 2017年11月15日

@Rocky_H:
"The other thing that makes this work is that they don’t seem to have limits on how much you can roll over from a traditional IRA to a Roth one. So you could put $5,000 in each kind, for a total of $10,000, and then the next year, pay the tax difference to roll the standard over into the Roth account, and you have a $10,000 Roth."

I thought the contribution limit was a combined limit for both... I didn't think you could put $5,500 into a traditional IRA _and_ put $5,500 into a Roth.

Another reason people select traditional IRAs over Roth is that there is an income limit to Roth IRAs. Pretty much any tech professional with a few years of experience here in the Bay Area wouldn't qualify.

I'm in the high-tax-rate-now-but-screwed-around-and-didn't-save-as-much-as-I-should-have-when-I-was-younger category myself. Which is why I'll "settle" for a Model 3 and not drop $100k+ on a Model S or equivalent like many of my coworkers and friends. I could easily "afford" a P100D now but I'd pay too much for it later.

Carl Thompson | 2017年11月15日

@burdogg

Nice! Clearly I need to talk to a retirement planning pro instead of trying to figure things out by myself.

burdogg | 2017年11月15日

@Rocky_H and Carl - Carl is correct on the IRA (Roth and Traditional) max. Meaning, you can only put in $5500 TOTAL between the two. So no, you can't put $5,500 in ROTH IRA AND $5,500 in Traditional in the same year. You can mix say $2,000 in Traditional, and $3,500 in ROTH making the total $5,500, just can't have the combined total go over $5,500.

Rocky_H | 2017年11月15日

@Carl Thompson & @burdogg, Oh, I hadn't looked at that aspect in a while. I hadn't remembered it was a combined limit. Sorry for misleading on that part.

@Carl, Quote: "Another reason people select traditional IRAs over Roth is that there is an income limit to Roth IRAs. Pretty much any tech professional with a few years of experience here in the Bay Area wouldn't qualify."

Yeah...did you notice that my last paragraph was all about that? You can put it in the traditional kind (that doesn't have the income limit) and then roll it to Roth the following year.

Rocky_H | 2017年11月15日

@burdogg, Oh yeah, and how did I forget about Roth 401K?! I had been hounding my company for a few years to make that available when it was created. It has the much larger contribution limits than the IRA kind.

Carl Thompson | 2017年11月15日

@Rocky_H:
"Yeah...did you notice that my last paragraph was all about that?"

Nope, sorry somehow I missed your last paragraph. Thanks!

Carl Thompson | 2017年11月15日

@Rocky_H

But if you rollover from a traditional IRA to a Roth you haven't paid income tax on that money which is supposed to happen up front for the Roth IRA. Or do you get charged tax (and penalties?) when you do the rollover?

burdogg | 2017年11月15日

Yes, you have to pay the taxes (no penalties) on the conversion amount you do at the time of the rollover. They want their money one way or another :)

Rocky_H | 2017年11月15日

Yep, it gets documented in some side form when filing your taxes as a big tax bill for that year because you did the rollover to convert it.

Tesla2018 | 2017年11月15日

About 15 years ago I put about 20K from my regular IRA into a Roth IRA in a year when my income wasnt high since I got laid off. Being in a 15% tax bracket I paid $3000 in taxes on the transfer. I then bought stock with the money in the Roth IRA thinking it would go up in value and when I retired it would have doubled and it would all be tax free.
The problem was that it was in a stock that dropped in value to almost nothing so its only worth 5000 now. As a result I LOST money. I have been told that when I turn 59 1/2 in a few years its possible to take the 5000 out in full all on one year and claim 15000 as a loss on my tax return. However I have heard conflicting things about this. I know I could also keep it on the Roth and hope the value of it increases but figure that if I take it out in the yesr I retire and have income then I could reduce my taxes by showing a 15K loss. After I retire I wouldnt want to do this since my income bracket and earnings would be near zero and I wouldnt be able to use the benefit of a 15K loss. Do current tax laws let you still close out a Roth and show a loss against income?

burdogg | 2017年11月15日

Good question - I have never looked into this, as this is a rare case (or would hope it is). Placing that money all in one stock and not paying attention to it is well, as you can see, not wise. Retirement accounts are better placed in Mutual Fund if you are not going to pay attention to it. Stocks truly need to be managed, bought and sold at times. Some companies as you experienced, don't grow, don't pay dividends and you in fact loose all your money. Other companies go up and down so much that in the end, you may just net even because you didn't ever sell when it was worth so much and over the years, it dropped back down.

So the wise lesson, if you are investing and letting it grow for years on end and not going to pay attention to it or pay someone to pay attention, put it in something safer like a mutual fund.

NoMoPetrol | 2017年11月17日

@ Carl Thompson "But I was hoping that I could help NoMoPetrol avoid making what seems like a mistake that could hurt him and his wife"

After sober reflection I've come to my senses. I cannot, in all honesty, afford the Roadster 2 without driving my wife and me into a homeless shelter :)

Rutrow | 2017年11月17日

I thought about ROTH losses a while back, never did the research to see if losses are deductible, but it would be a racket if they are. The kind of shady deal that only Wall St. Bankers would implement, privatizing profits while socializing losses. Which makes me think that, Yeah... they probably are deductible.

Carl Thompson | 2017年11月17日

Remember our wonderful president apparently was able to write off other people's losses to avoid having to pay taxes for years. Now _that's_ a good deal.

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