| savings options for higher income folks? |
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sam1000
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| savings options for higher income folks? |
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My income is about $115,000/yr (non-adjusted) and that disqualifies me for an Roth IRA (I'm single, no kids and no other deductions). I was listening to Suze Orman and she was mentioning that investing in a 401k past the point of the match was not a good idea because tax brackets are going to be way higher in the future (I'm 32 right now so I have 33yrs to retirement).
While I'm not going to whine about how poor I am, I am not rich either, far from it  I would like to know if there are any ways I can get to save money in a plan like a Roth where my income goes tax free.
Opinions, Ideas?
Thanks much 
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Thu Feb 02, 2006 1:48 am |
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kristinecfp
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| Savings options for higher income folks |
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Some options would be:
Municipal bonds and bond funds (interest is exempt from federal tax, and state tax if you buy a bond in the state you live in)
Index funds or Exchange Traded Funds - although these are not tax-free, they are tax efficient. Large cap index funds/ETFs are generally more tax efficient than small cap or foreign funds. You could invest your after-tax money in these types of investments, and invest your 401K in less tax efficient funds and have a diversified portfolio.
Hope this helps.
Kristine A McKinley, CFP, CPA
Beacon Financial Advisors
www.beacon-advisor.com
Hourly, fee-only financial planning. Guiding you to financial security.
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Thu Feb 02, 2006 2:49 am |
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kristinecfp
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| Saving options for higher income folks |
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One more thought... I agree with Suze Orman that investing all of your money in a 401K, beyond the company match, may not be the best strategy. Because long term capital gain tax rates are so low, and also because tax laws change all the time, I think it's a great idea to diversify your portfolio from a tax perspective as well as from an asset allocation prospective. That means investing in tax deferred investments (your company 401K), tax free investments (Roth IRA), and taxable investments (non-retirement investments). By diversifying your portfolio from a tax standpoint, you open up many more tax planning opportunities, especially during retirement when you start withdrawing your investments.
Kristine A McKinley, CFP, CPA
Beacon Financial Advisors
www.beacon-advisor.com
Hourly, fee-only financial planning. Guiding you to financial security.
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Thu Feb 02, 2006 2:59 am |
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Rolo
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| Re: savings options for higher income folks? |
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quote:
Originally posted by sam1000
investing in a 401k past the point of the match was not a good idea because tax brackets are going to be way higher in the future
I find it silly that the same people who say you cannot 'predict the future of the market' will predict the future of tax laws. I find it more amusing that, at this very point in time, that statement is completely wrong, since our tax rates were lowered and more deductions and credits given. i.e. one would have paid the 55% income tax rate during the Carter years to avoid the 38% rate now.
Then there's compounding. If you keep your 35% you save by avoiding taxes because you used the 401k for its intended purpose and compound that over 33 years, what do you get? Let me put it another way: If you were given a choice to pay your income tax now or 33 years from now, which would you pick?
Personally, I do expect my income taxes to be higher in retirement because my standard of living/income will also increase. Irrespective of that, I still take advantage of the 401k tax break to keep my money working for me.
"Expect me when you see me."
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Thu Feb 02, 2006 5:06 am |
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Rolo
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| Re: Savings options for higher income folks |
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quote:
Originally posted by kristinecfp
Municipal bonds and bond funds (interest is exempt from federal tax, and state tax if you buy a bond in the state you live in)
Penny-wise and dollar-dumb.
Look at this table and tell me you want munis:
http://news.morningstar.com/fundReturns/CategoryReturns.html?msection=FundCatReturns
Compound tax-free muni returns over 33 years vs. any decent stock fund, taxed (assuming it is not going in the 401k) over 33 years and tell me you still want munis..?
Also noteworthy: "Conservative allocation" funds...you would have lost all of your measly gains, and then some, to inflation. That doesn't sound very conservative to me.
Finally, don't pick '65' as your retirement age because..well...that just what you do, right? Social[ism] Security, right? You're eligible for distributions at 59-1/2. Personally, I plan to have zero work obligations at 55.
"Expect me when you see me."
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Thu Feb 02, 2006 5:16 am |
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Jaszbo
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You may be able to contribute if you are married and depending on how you file?
I agree 100% with kristinecfp and I would look at ETFs and munipal bonds. Actually ETFs regardless of tax bracket I like, but munipal bonds for you my friend is a good investment. Your tax bracket means it's a much better place to invest.
If you are asking about just retirement accounts, I would max out your 401k plan. If you don't qualify for a Roth IRA, who cares it's just a bonus........ it doesn't mean for you not to put as much money as possible. If you are making 115k and you put in 10% of your money, do you understand that you are only going to pay taxes on about 104k of your money.
Let me tell you that nobody can predict the future of taxes, but let's just assume it's not going to change. You are in a high tax bracket right now and when you retire you will not have to save as much money for retirement, your house will most likely be paid off, if you have kids they will be out of your life...etc, so a good assumption is that you will be in a smaller tax bracket. For your situation a 401k plan might even be a better option than a Roth IRA. I would recommend both, but if you can't invest in both, then I would go with a 401k plan and maybe if you like other investing options a traditional IRA.
Ok if you are in the 28% tax bracket and you are thinking about munipal bonds for instance. There's a fund over at T. Rowe Price (PRFHX) has returned 6.20% for the past 5 years, which is free from federal taxes and some state taxes. If you want to take into consideration how much you have to make on a 6.20% bond if you were investing in another product............. at 28% tax bracket you would have to make 8.61 % return. This only takes federal income taxes into consideration if you are paying state taxes and you are exept, you could get a return of 9% or higher. 9% or higher might not sound like much, but we're talking about bonds that are fairly secure. In the past 10 years only the year 1999 did most bonds have a negative return. This particular fund for instance returned -5% that year. I wouldn't say you should put all your investment in bonds, because they aren't the best investments, but for those who are are paying high federal income taxes and state taxes can make a difference.
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Thu Feb 02, 2006 1:27 pm |
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MattL
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| Re: savings options for higher income folks? |
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quote:
Originally posted by Rolo
quote:
Originally posted by sam1000
investing in a 401k past the point of the match was not a good idea because tax brackets are going to be way higher in the future
I find it silly that the same people who say you cannot 'predict the future of the market' will predict the future of tax laws. I find it more amusing that, at this very point in time, that statement is completely wrong, since our tax rates were lowered and more deductions and credits given. i.e. one would have paid the 55% income tax rate during the Carter years to avoid the 38% rate now.
Then there's compounding. If you keep your 35% you save by avoiding taxes because you used the 401k for its intended purpose and compound that over 33 years, what do you get? Let me put it another way: If you were given a choice to pay your income tax now or 33 years from now, which would you pick?
Personally, I do expect my income taxes to be higher in retirement because my standard of living/income will also increase. Irrespective of that, I still take advantage of the 401k tax break to keep my money working for me.
I doubt Suze said that she knows tax brackets will be higher. She most likely said the COULD be higher.
It makes sense to go with a ROTH because you are paying taxes just on the amount invested, not the amount invested plus the amount earned as you you would with a traditional IRA.
As others have metnioned, it's best to diversify your tax position as well as your investments.
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Thu Feb 02, 2006 9:31 pm |
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Jaszbo
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MattL I can tell you that I have heard suze say that we paying lower taxes now than we generally did in history. She did say that she expects us to pay more in the future and honestly I can see where she's coming from. Social security is a problem I don't see going away and there's other reasons why taxes could increase, but I agree with Rolo in why guess.
I don't see any need in guessing if we'll pay more or less in taxes. If you are able to invest in a retirement before taxes and you are able to invest in a retirement after taxes, I think you should do both. If there was no matching and I only could take one, I'd probably take the Roth IRA if it was just becuase of the investment options.
I honestly agree with suze and all the rest that say do your 401k plan up to matching, then go to your Roth IRA and max it out and then come back to your 401k plan and do as much as you can there.
I just don't like hearing much about speculation. You can do a search in google about how many people think that the Roth IRA is going to be taxed eventually, becuase it's too good to be true and the reason some people think that is because they did it with social security. A lot of people who bad mouth the Roth IRA do not qualify for it or they don't have earned income. You ever wonder why Suze Orman, Dave Ramsey and Clark Howard all three recommend it and none of them qualify for it. WSJ I believe named it the best retirement investment you can make. But if you don't qualify you don't qualify, big deal.... do the best you can do with pretax money with your 401k plan, tradtional IRA...etc
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Thu Feb 02, 2006 10:12 pm |
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SkyPilot
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Like all media analysts, if they are so wise, why are they on TV and not a yacht?
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Thu Feb 02, 2006 10:34 pm |
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coaster
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I doubt they'll change the rules down the road and tax Roth IRAs. Too many outraged people will vote the buggers out of office if they try.
~Tim~
Eye Candy : Why Whimsy
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Thu Feb 02, 2006 11:51 pm |
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sam1000
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Guys, thanks for the advice. Remember that I am NOT eligible to participate in a Roth IRA since my AGI is over 100K. That was the entire point of this thread 
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Fri Feb 03, 2006 1:40 am |
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No-Brainer
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| You're eligible for this! |
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You say you are single, so why not buy a house so you can keep it two years, sell at a profit and keep it tax free while you move to another one.
Without a wife and family to tie you down, you could make this run like a well oiled machine cranking out a steady tax free income payable every two years of so.
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Sat Feb 04, 2006 7:18 pm |
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coaster
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Selling a house at a profit after holding for only two years is not a sure thing. In fact, it's a rather unlikely thing if you have to list it with a broker. The hot housing market has cooled off. In most parts of the country it's back to somewhat near normal. Say appreciation of 5% a year, so 10% after two years. Subtract from that 6% for the broker plus your expenses and closing costs, and your property taxes and interest on your mortgage, and you moving expenses, and you could easily be well under break-even.
~Tim~
Eye Candy : Why Whimsy
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Sat Feb 04, 2006 8:16 pm |
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No-Brainer
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quote:
Originally posted by coaster
Selling a house at a profit after holding for only two years is not a sure thing. In fact, it's a rather unlikely thing if you have to list it with a broker. The hot housing market has cooled off. In most parts of the country it's back to somewhat near normal. Say appreciation of 5% a year, so 10% after two years. Subtract from that 6% for the broker plus your expenses and closing costs, and your property taxes and interest on your mortgage, and you moving expenses, and you could easily be well under break-even.
I would assume most people would put a little more thought into it rather than dismiss it so quickly.
Buying low and selling higher in two years is actually a no-brainer if you look around and pay attention. I personally know couples that are doing this now.
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Sat Feb 04, 2006 8:52 pm |
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coaster
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It can be done in locations where prices are appreciating in excess of the historical norm. However, this isn't happening everywhere, and isn't going to be continuing forever. In fact, it may very well already be over. Five percent per annum appreciation is more like normal in most parts of the country, and it's simply not possible to realize a profit in two years. Those who think real estate is the holy grail of easy money haven't been through a full market cycle. And the downside of real estate is its illiquidity. Sure, if you own a house in a hot market you can sell it in 24 hours. Again, this isn't the norm. I'm a homeowner in a part of the country where the housing market is more like normal. And I've lived through several real estate cycles. I didn't dismiss it flippantly. I stand by what I said.
Real estate should be a core holding in everyone's net worth as a way to build wealth over time. But as a means of cranking out easy money every couple years....nope. Don't buy it. It's not for everyone everywhere. Sorry.
~Tim~
Eye Candy : Why Whimsy
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Sat Feb 04, 2006 9:32 pm |
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