Income/ tax/ retirement help

[waverly]

We've been using a tax preparer/ accountant the last 2 years and DH is looking for more assistance with taxes.  Our accountant has not really provided that much.  

Our financial planner just tells us to max our tax deferred retirement.

But no one is helping us with the calculations, so I was telling DH that we just need to do that ourselves.

So how do I calculate this?  DH has a 401K through work and is maxing which I believe is 19K.  He is not putting anything in his IRA.  Nor does he have any kind of Roth that he is contributing to, and he would only be eligible for a 401K Roth anyway.  He is not eligible for a IRA Roth or a backdoor Roth, and Roth doesn't help with taxes anyway which was the point.

I have a pension and a 457b.  I am putting, I think, $125 in the 457b every 2 weeks.  The pension on my pay stub says $115 every 2 weeks. For the 19K do I add the pension plus the 457B? If I times $125 by 26 and $115 by 26 pay periods and add them together I get $6240.  

So then what?  Do I just subtract our income by the extra 12,760k (approx.) that I would put in and see if that shows a reduction in taxes? In the tax calculator? I mean I don't think it would be a 1 to 1 ratio, where I also save 12K on taxes, right?

This is also complicated by DH working 2 jobs at the time, and then getting paid out for vacation at his old job.  So that would raise the yearly taxable numbers.... Or do we just give up and say there is nothing we can do... Because I guess I don't know what the annual income would be since he has old job at one rate, new job at another rate, and vacation pay out.  

Also what are you all withholding?  I am doing 0 withhold at a higher rate.  DH was withholding too little, so I hope he changed it with the new job, but I am not sure what he put on the paperwork...

[Poppy]

I don't understand how he's not eligible for backdoor Roth? You're correct though that it doesn't help with taxes now, the tax savings come mostly in retirement as you wouldn't pay income tax or capital gains on money from your Roth account.

There is not really that much that ordinary people can do to avoid taxes. H and I can't even itemize anymore with the new standard deduction, so even charitable contributions don't help.

With regard to increasing your own contributions to tax deferred accts, it would not be a 1:1 ratio of tax savings. Basically, you wouldn't pay income tax on the $12k you would be diverting to your 457b. Depending on your tax bracket (which I'm inferring from your Roth comment), you'd "save" ~24% of that $12k at tax time.

The IRS has a withholding calculator, have you played with that?

[waverly]

I am playing with their calculator on their website, but we have so many variables. I think I did something wrong (and I was estimating since I don't have his paycheck in my hands at the moment).

I think it said 70K tax liability, but then when I put in the 12K additional withholding it said 38K tax liability which doesn't seem right, so I must have done something wrong...

24% of 12K is probably a better number, so saving 3K overall tax liability? So I would pay 9K more out of my budget, but save 3K in taxes, but have 9K more in my retirement?

[dcn]

What i usually do is to take last years tax return and do a mock up for this year in excel. You can find the tax tables on the irs website - I put a formula in to calculate. I don’t find it confusing or complicated but full disclosure I’m a cpa, though I haven’t prepared taxes other than my own in over 10 years.

Also, did you ask your accountant to help? They probably won’t offer unless you communicate that you’d like to figure out a way to withhold more or reduce your tax liability. They will charge you for it, but they can run scenarios for you easily.

[waverly]

Apr 23, 2019 12:47:15 GMT -5 dcn said:

What i usually do is to take last years tax return and do a mock up for this year in excel. You can find the tax tables on the irs website - I put a formula in to calculate. I don’t find it confusing or complicated but full disclosure I’m a cpa, though I haven’t prepared taxes other than my own in over 10 years.

Also, did you ask your accountant to help? They probably won’t offer unless you communicate that you’d like to figure out a way to withhold more or reduce your tax liability. They will charge you for it, but they can run scenarios for you easily.

We asked last year and he just said to keep everything the same.  Fast forward to this year and we owed 6500 in taxes.  To be fair I think the new tax tables hadn't come out when we asked him, but it would have been nice if he had taken the initiative to correct the previous advice.  Also I think he might be a bit pricey, so we might look for someone a little closer.  If the price is better then we would have extra money to spend on scenarios.  

What do people usually pay?  We had multiple state returns (traveling) 2 years ago, that we didn't have this year and he still charged us $50 more.  Unless they just up their prices $50 every year? 

[waverly]

Apr 23, 2019 12:47:15 GMT -5 dcn said:

What i usually do is to take last years tax return and do a mock up for this year in excel. You can find the tax tables on the irs website - I put a formula in to calculate. I don’t find it confusing or complicated but full disclosure I’m a cpa, though I haven’t prepared taxes other than my own in over 10 years.

Also, did you ask your accountant to help? They probably won’t offer unless you communicate that you’d like to figure out a way to withhold more or reduce your tax liability. They will charge you for it, but they can run scenarios for you easily.

I don't find the website confusing. I find calculating our income confusing especially with not having all the numbers in front of me and mid year job changes plus vacation pay outs and potential bonuses that I am not sure when they will pay out. 

[gt7301b]

You should be able to max out your 457b in addition to your pension contribution. If possible I would increase the 457b to 19000 or 731 a pay period. 

In your example if you contributed an additional 12,760 this would come off your taxable income.  So if you were in the 25% tax bracket you would save $3,190 in taxes.

www.thestreet.com/story/13499764/1/why-your-401k-means-more-to-your-tax-return-than-you-think.html

I'm also not sure why you/your husband aren't eligible for backdoor Roths.

I would just ask your employer to withhold extra money each pay period.  I can go to my employer's website and add an additional fixed amount to be taken out of my paycheck every pay period.

I know it is frustrating to owe more money than expected, but this may just be because the GOP was deceptive with the tax changes and changed the tables so it looked like individuals were receiving a bigger benefit than they actually were.  For example, we owed twice as much as we did last year, but our overall effective rate went down.  But that doesn't make it any less painful to write the check.

[waverly]

gt7301b, I don't know either on the backdoor Roth. First he said we were eligible and then he said we weren't, but either way he wanted us to max out the pre-tax options before doing a back door Roth anyway. So in his advice, we weren't ready for it anyway.


We might overall owe less, DH has that info somewhere in an excel spreadsheet, but we just haven't had the time to really look at anything recently. It's been crazy busy lately.

[ribollita]

Everyone is eligible for back door Roths, although it can be complicated by existing traditional IRAs. There are tax benefits but they come at the time you withdraw the money tax-free during retirement.

I would start by maxing your 457b. I would not do more for him until your retirement is equivalent.

[badgergrl]

I am required to contribute to my pension but can max my 19k out in my 457 separately. I would not look for other options for your husband until you are putting 19 k away also. Then 12 k (6 each) to back door Roths. If at that point you have other money to invest then seek out help but if you are leaving tax preferred options on the table I would start there.

[Poppy]

Apr 23, 2019 11:48:21 GMT -5 waverly said:

24% of 12K is probably a better number, so saving 3K overall tax liability? So I would pay 9K more out of my budget, but save 3K in taxes, but have 9K more in my retirement?

So yeah, you would be investing the extra 12k throughout the year and it would lower your tax liability by 3k. Therefore, you could lower your withholdings by the 3k so your paycheck would be higher (although it sounds like you need to increase your withholdings to avoid owing, but this would offset).

Do you have your 1040 from this year? Do you expect your earnings to be similar? You should be able to look at your 2018 tax liability (line 15) as a sanity check. You can also look at your adjusted gross income (line 7) to check against the Roth limits (caveat that there are a few things that "modify" this including student loan deductions). But even if it's over the official contribution limits, you should be able to do a backdoor Roth which means that you contribute to a traditional IRA and then convert it (essentially roll it over) to a Roth IRA.