My firm prefers to use Limited Partnerships (a flow-through entity). It doesn’t really change the income tax that much, but it has a drastic impact on self-employment tax. (a.k.a Social Security and Medicare tax) You may not have a Canadian equivalent.
We have LP’s (and they are flow through) but they aren’t overly common. My understanding is the governance rules around owning the GP (a corp) and being an LP make it difficult unless you have some scale. Since our corporate tax is well integrated (in my view) for small businesses, I’m not sure there is much of a tax advantage. You can avoid payroll taxes (Canadian pension + Employment Insurance) by paying dividends instead of salary, if one wishes, from your small corp.
Anyway, don’t want to derail the thread though, sorry.
I keep seeing HCB instead of HCE.
I contribute max match to my 401k and put half in ROTH half in traditional. I look at this as a hedge on tax rate. Does this make sense? Maybe Greenie has some advice?
I do the same, although I do somewhat fear that the government’s future need for money will result in the ROTH withdrawls having some minimal level of taxation.
I also used to do the same, but when our plan gave us the option of moving assets to a brokerage window I had to go all traditional. Can’t move assets to a brokerage account if it’s roth money - at least in our plan.
Sounds like you have a retirement plan at work. And since you’re undoubtedly a BSD, I’m sure you (and your wife) make >$115k per year. (Or if you’re single, I’m sure you make >$69k.)
But since you put money in a Roth IRA, you must make
If all this is true, then it makes absolutely no sense ever, whatsoever, to put money in a Traditional IRA. The contributions aren’t deductible, and the withdrawals are fully taxable.
(Edit - the deductibility of the contributions depends on whether you have a company-sponsored retirement plan and whether you wife has one. The above example assumes you both have a company-sponsored retirement plan. If only one of you has one, the income limit is $183k. If neither of you have one, there is no income limit.)
If you’re not a BSD and make less than $115 (or $69), then you’re in a low tax bracket, and it still would make sense to put into the Roth, because your tax bracket in retirement will undoubtedly be equal to (or higher) than the tax bracket you’re in right now.
If you make >$188 (or $127), then you cannot contribute to a Roth. And your contribution is not deductible. (Shtty, I know.) But you still get to take advantage of tax deferral, and the money that you contributed can be withdrawn tax-free (since it’s simply a return of capital).
To make a long story short–I would never advise somebody to contribute to a Traditional IRA if they were eligible for a Roth.
Higgs makes a decent point (about taxing Roths), but I think that the political consequences of suggesting such a thing would far outweigh any benefit that Uncle Sam got from tax revenues. I doubt this will ever happen.
That’s a fear of mine as well. My concern is that you’re overestimating the political consequences because I’d be willing to bet a minority of people would hold Roth accounts and they’d sell it as taxing the people who can afford it anyway.
I mean Social Security benefits used to not be taxable until the 1980s…so there is reason to worry about the govt changing its mind.
I tend to agree with Greenman, and especially considering the massive sh!tshow we are in with Obamacare, I have to recommend that anyone that can put money in the Roth account should do so instead of a traditional IRA. If you are at least a half-sensible investor, the compounding effects of tax-free investing should far outweigh the upfront conversion taxes you’d even pay to roll a traditional account to a Roth account.
FYI–I live in Texas. Ergo, I shall make no apology for saying husband and wife. We do not recognize gay marriage in my state. (And state law dictates IRS procedure in situations like this.)
ROTH all the way if you’re eligible…that is the only way most people have a chance to go big AND go home (to a lovely retirement in the future)
^ I can just see it. Obama’s daughter up for election in 2052 or some ish, pounding the gavel saying,
“These greedy fcking Republican Wall Streeter’s have CHEATED us tax paying hard working Democrats long enough! They have this tax exempt loophole giving them tax free income at retirement. The current estimate contained in this tax exempt loopole is $2 Trillion making the shortfall on our tax revenue $1 Trillion. When I become president, I will make the rich pay their fair share and close this loophole once and for all! No grandfathering in either Numi and Lxwarr30!”
–
And that’s that. It’ll take 1, just 1, frenzied speech such as that demonizing us hard working financiers. Then it’s all over folks.
For this reason, I diversify not only in my investment allocation, but also my tax implications. I use an HSA, Roth IRA, Traditional IRA, and 401k. I used to hammer it out in the Roth, but since I got a new job, I’ll likely be ineligable. Now I’ll need to learn how to contribute to my traditional IRA along with my 401k. Mo money mo problems.
The company can avoid this problem by making a safe harbor contribution/match. If they make a 3% contribution or a 4% matching contribution, then the high-comp employees can max out. But since the company contribution does not meet either of these requirements, the high-comps get the shaft.
I miss having my HSA that I lost when I changed jobs since my company only offers 1 plan, a full line comprehensive plan. I could have kept my old HSA but the MFers would have charged a monthly fee to keep the acct open that would have just ate away at the balance and I wouldn’t have been able to contribute any more anyway.
If the government really cared about limiting/lowering healthcare costs they’d allow everybody to use HSAs. People are surprisingly rational when spending their own money as opposed to their insurers.
Respect.
#MoralHazard
Agreed with CFAvsMBA and krazykanuck
By the way, how do you guys think about HSA contributions? I’m a healthy individual and contribute about $400 to my HSA annually, thinking that I don’t want to put in more and risk it being unused (and thus going to waste). However, for various reasons it almost always gets spent, and even if it doesn’t, I figure any “excess” can be used for things like contact lenses and cleaning solution. You’d think that as an equity analyst I’d do a better job forecasting my HSA spend, but it always seems that year in, year out, I underestimate how much I actually can use the HSA spend.
But HSA balance carries over from year to year, right? The way I see it, since you can usually invest HSA in funds, you should make a higher contribution while you are young, let the balance grow, and use this to fund your future healthcare costs, which will probably be higher than your current healthcare costs. If you later think you saved too much in your HSA, you can reduce future contributions. This assumes that your future marginal tax rate will not be substantially higher than your current marginal tax rate.
Numi, I think you are talking about your flex spending account (FSA) not an HSA. HSA can be used just like an IRA to save for healthcare and does not need to be used in a given year. It is usually only available through high deductible health plans, I think. I have one that my company actually contributes to for me, but that’s going away this year because I need to get on a bigger plan.
FSAs are kind of stupid, I think. It’s basically saying: “ok, we’ll give you tax deferred status on your contact lens solution but if you get cancer you’re paying out of pocket.” I really don’t get the thinking behind it.
Yeah, your HSA balance rolls over from year to year. It’s essentially restricted cash. You can only contribute to your HSA if you have a high deductible plan, so if you’re like me and went from a high deductable plan to comprehensive, I could keep my balance and use it, I just couldn’t add any more to it. FSAs are the accounts where you make an annual “use it or lose it” contribution and those are available to people with comprehensive plans. FSAs are only good if you know you’re going to have a big expense next year (like lasik, or orthodontics for your kid, or something you can estimate with reasonable certainty).
At my old job, my employer contributed about $650 a year to our HSA which was about what I paid for my employee part of the coverage. Essentially “free” insurance.