OT: Tax Deductible Retirement Accounts

[anon_0k9zlfz6lz9oy]

I've gotten a head start on saving for retirement and over the past few years have been running money through a SEP ira through vanguard in their vfiax fund which saves me a nice chunk on my tax bill as I am self-employed. Are there any other type of accounts that I should be aware of that might be more tax advantageous to me and save me more money on my tax bill?

Thank you in advance.

 

[phs73rc77gsm83]

Good job on getting started early, the more years of compounding the better, dramatically. Also good job in selecting a low cost provider in Vanguard. Fees make a huge difference over time. The 500 index is low cost and provides a level of diversification, at least with respect to larger cap US companies. Total equity market and a combo of total market bond is a bit more diversified, as would be if you added an international component. S&P is weighted more to larger companies so total market gives you different market caps but in my view the 500 isn't all bad depending on your philosophy. Some people follow a three fund asset allocation through Vanguard or other providers (Google or look at Bogleheads forum). Be sure to max your SEP contribution. Keys in my view are maximize contributions, select a low cost provider such as Vanguard, select an asset allocation that you'll adjust over time, and stay the course.

 

[anon_0k9zlfz6lz9oy]

Good job on getting started early, the more years of compounding the better, dramatically. Also good job in selecting a low cost provider in Vanguard. Fees make a huge difference over time. The 500 index is low cost and provides a level of diversification, at least with respect to larger cap US companies. Total equity market and a combo of total market bond is a bit more diversified, as would be if you added an international component. S&P is weighted more to larger companies so total market gives you different market caps but in my view the 500 isn't all bad depending on your philosophy. Some people follow a three fund asset allocation through Vanguard or other providers (Google or look at Bogleheads forum). Be sure to max your SEP contribution. Keys in my view are maximize contributions, select a low cost provider such as Vanguard, select an asset allocation that you'll adjust over time, and stay the course.

When I begin to re-allocate when I get older and move into more bonds from equities I'm going to get hit with a cap gains tax as well that I should account for no? (Im 25 now)

 

[gringo]

I've gotten a head start on saving for retirement and over the past few years have been running money through a SEP ira through vanguard in their vfiax fund which saves me a nice chunk on my tax bill as I am self-employed. Are there any other type of accounts that I should be aware of that might be more tax advantageous to me and save me more money on my tax bill?

Thank you in advance.

No probably nothing that is more tax advantageous, but you may be able to save more even if you are maxing your SEP contribution. This article is old but makes some good points.

https://www.nerdwallet.com/blog/investing/sep-ira-traditional-contribution-limits/

 

[gringo]

When I begin to re-allocate when I get older and move into more bonds from equities I'm going to get hit with a cap gains tax as well that I should account for no? (Im 25 now)

No anything you do within the SEP has no tax implications. Only becomes taxable when you make distributions from the SEP

 

[anon_0k9zlfz6lz9oy]

No anything you do within the SEP has no tax implications. Only becomes taxable when you make distributions from the SEP

Nice so if I sell shares through my SEP and then purchase bonds with the proceeds of that sale through the SEP I dont have to pay taxes until i begin taking distributions? Also, lets say hypothetically I wind up growing that account to $13 mill. And I'm ready to retire, can I pull all that money out at once, pay cap gains tax on it and then throw it into fixed income investments?

 

[gringo]

Distributions count as income not capital gains. Wouldn't make sense paying income taxes on $13mil in one year. Also at a certain age (71 right now I think) the IRS forces you to take a distribution based on your age and account value. Google RMD or required minimum distribution

 

[rutgersdave]

Nice so if I sell shares through my SEP and then purchase bonds with the proceeds of that sale through the SEP I dont have to pay taxes until i begin taking distributions? Also, lets say hypothetically I wind up growing that account to $13 mill. And I'm ready to retire, can I pull all that money out at once, pay cap gains tax on it and then throw it into fixed income investments?

You can withdraw the money at any time but if you withdraw before 59.5 years old, you will pay a 10% penalty plus taxes on the amount you withdraw. Remember that you never paid any taxes on your contribution so any contribution or capital gain withdrawals will be taxed. If you don't withdraw anything, you will have automatic withdrawals starting at 70 for the government to be able to tax your money. You can withdraw all of it all at once but it would be advantageous to see a tax advisor.

 

[anon_0k9zlfz6lz9oy]

You can withdraw the money at any time but if you withdraw before 59.5 years old, you will pay a 10% penalty plus taxes on the amount you withdraw. Remember that you never paid any taxes on your contribution so any contribution or capital gain withdrawals will be taxed. If you don't withdraw anything, you will have automatic withdrawals starting at 70 for the government to be able to tax your money. You can withdraw all of it all at once but it would be advantageous to see a tax advisor.

Any tax advisors you can recommend? In particular one thats not going to try and charge me 100bps haha

 

[retired711]

Beginning at 70.5 you will have to take a "minimum distribution" each year. This is a problem if you plan to work beyond 70.5 because you will be paying tax on the distribution as well as on your regular income. For the time being, though, just keep doing what you're doing: sock money away each year in the SEP.

 

[gringo]

1) take phs73's advice and diversify. You are all Large Cap and should add mid-small cap, International, emerging markets and fixed income. Research asset allocations for someone who is 25.

2) Rebalance to your asset allocation every year - which will change as you get older. If you make one lump sum contribution each year use to to balance your investments

3) Don't change 1&2 when the market has a down period. If you have only been doing this a few years you have probably just watched it go up and up.

 

[anon_0k9zlfz6lz9oy]

1) take phs73's advice and diversify. You are all Large Cap and should add mid-small cap, International, emerging markets and fixed income. Research asset allocations for someone who is 25.

2) Rebalance to your asset allocation every year - which will change as you get older. If you make one lump sum contribution each year use to to balance your investments

3) Don't change 1&2 when the market has a down period. If you have only been doing this a few years you have probably just watched it go up and up.

Yeah I'm investing on dollar cost average. Down or up im investing the same amount every year. Only thing I struggle with is knowing every little tax detail

 

[rutgersdave]

Any tax advisors you can recommend? In particular one thats not going to try and charge me 100bps haha

You don't need to find one probably until you decide to withdraw if you have a large balance. I'm over 60 and thinking about withdrawing a large amount, paying the taxes and moving it over to my ROTH IRA when Trump lower the tax rates. I expect the rates to go up when he leaves office since the deficit will increase substantially. In addition, if you wait till 70.5 to start withdrawing, the yearly amount can be very large like $200,000-500,000 depending on the balance since it is base on your life expectancy which is close to 82 years old or distributed mainly over 12 years.

 

[zubz]

In addition, if you wait till 70.5 to start withdrawing, the yearly amount can be very large like $200,000-500,000 depending on the balance since it is base on your life expectancy which is close to 82 years old or distributed mainly over 12 years.

First year's RMD is about 3.5% and Increases slightly each year. It will not be drawn down over 12 years. Like at the IRS table. It goes out to age 120 I believe not 82.

If you are just taking the RMD there is a decent chance your principal will stay in tact for the majority of your retirement.

 

[BigDaddyLane]

If your concerned about taxes regarding retirement accounts, market based solutions will kill you in the end!

 

[rutgersdave]

First year's RMD is about 3.5% and Increases slightly each year. It will not be drawn down over 12 years. Like at the IRS table. It goes out to age 120 I believe not 82.

If you are just taking the RMD there is a decent chance your principal will stay in tact for the majority of your retirement.

I guess I'm wrong and finally looked at the calculation.

 

[kjb32812]

At that age I would definitely want to run Traditional vs. Roth scenarios. Depending on your current marginal rate and income level, saving taxes now may not be the smartest thing to do. Lots of other considerations (employees...guessing none, equity in business, etc.) but if you are making serious coin and have 35 years then diversifying your tax situation could make sense.

 

[phs73rc77gsm83]

As stated by other posters, you don't really need annual tax planning for investments within an IRA, distributions will be taxed as ordinary income upon distributions. With regard to potential early withdrawals you can avoid the penalty of early withdraw by taking 72(t) distributions of substantially equal payments but that shouldn't be a concern for you at your age. We're getting ahead of things here. Be diversified, save early, live below your means, max contributions, go with low cost provider as you have. Most importantly, make an effort to learn as much as you can about personal finance. I'm amazed at how many otherwise smart people don't make the effort to learn about personal finance.

 

[patk89]

Generally, given your age, be more aggressive in your retirement accounts since taxes are deferred and less aggressive outside of those accounts. But, you always need cash for things like buying a house so don't choke out your non-retirement savings. You may have a job loss or illness. No telling what the future holds for you. But, the more you defer spending and save, the better you'll be in the future. Whether that be early retirement or the ability to fund education for your grandchildren.