The author has 3 children, and that's a _household_ income of $150000. 150 grand is not a huge family income to support 2 adults and 3 kids; as a country, we give people tax breaks to encourage having children and to help support people who make that choice.
Calling this "Houdini-like" (author's words) tax hacking seems like a bit of a misunderstanding of deliberate social policy!
The two biggest reducers he cites are 401k contributions and tax-loss harvesting.
#1. 401k.
While this is a great idea, if he's trying to retire at 33, putting 17.5k away from his 70k paycheck is not going to help because he can't touch it until he is 59.5 (w/o penalty).
#2. Capital losses
Tax-loss harvesting means selling securities that are underwater to get a capital-loss deduction. I don't know where to start explaining why this is such a bad idea. I'll pick the two most compelling reasons why this is dumb. First, you can only do this so many times before you've whittled your investment to zero. Second, you are violating the most basic principle of standard-person (non-rich) investing: buy and hold.
>because he can't touch it until he is 59.5 (w/o penalty).
That's not quite true. With 5 years of preplanning, you can get money out of a 401k without any penalty at any age (although, you will of course pay taxes on it) by doing a backdoor Roth IRA ladder.
Most tax-loss harvesting strategies incorporate a re-buy of a similarly-performing but substantially different asset. Of course, selling an asset just to maximize tax losses is unwise, but in the context of diversifying your portfolio, tax loss harvesting has its place.
Say you own VTI, a total US market etf. Then the stock market drops 20% next week.
You can sell VTI and with the proceeds immediately buy VOO (s&p500 etf) within seconds.
VOO and VTI are insanely correlated, so you’ve basically triggered a 20% loss for tax purposes, without actually selling any of your exposure.
That said, it’s not as big of a value as you might think, since you’ve also stepped down your basis, and need to pay more capital gains taxes when you sell since you “bought” at a lower price now.
Generally accepted wisdom is to TLH up to the yearly loss deduction amount (like 3k or so) and stop.
The suggestion in the link was to sell investments that are underwater and replace them with similar assets, in order to remain invested. Not similar enough to be considered a wash sale, though.
It's not strictly speaking incompatible with buy-and-hold, from my perspective. I'm not an expert though, I don't even live in the U.S.
This is for a couple with kids, so both can max-out 401(k)s, IRAs are still a thing wen you make <$124k, so they could make out both, and because of the kids, you can use pre-tax money for dependent care, and there are tax credits for kids.
The other giant caveat is they merely deferred taxes on $46,000.
For any of our friends outside the US, this is not normal. As someone with a similar income (single - not married couple) but 0 children, 0 "special" government deductions, etc, here's a breakdown of my 2020 numbers:
- Income from employer: $168K
- Investment income: $41K
- Total income: $209K
Deductions (rounded numbers):
- $19.5K (private retirement 401k)
- $12.5K standard deduction
- $3.5K health care savings
- $3K MEME stonks losses :(
Approximate taxable income after deductions: $170K
Taxes paid:
- Federal Income tax: $32K
- Federal Social security (gov't pension / disability insurance): $8500
- Federal Medicare (gov't old age health care): $2500
- State Taxes: $10K
Total taxes: $53K
So I'm looking at about 25% taxes due. Also, my employer had to match my federal Social Security and Medicare (which is essentially taken out of my pay), so it's closer to about 31%.
That's certainly better than what (it sounds like) you guys pay over in the UK, EU, etc, especially as my salary over there would be taxed in one of the higher brackets, while in the US, I'm in the "middle", though I have very few deductions that larger families will have (especially if they own a very big house in an expensive state).
In high tax states like California, you would add another 4-5% or so - you'd end up at 35%.
In the UK, I calculated I paid roughly 22% on a similar employee salary by putting enough money in pension contributions (+ employer match and government match).
I also have a limited company where I do occasional work (without having to increase my income taxed at 40%) and that I use to draw dividends from (up to free allowance) yearly and get some other advantages, which was a decent way to get extra untaxed income. These days the allowance is 2k so there is not much to get.
The disadvantage of using a pension is that I won't get that money until I'm 60 (and they keep increasing the age where you can withdraw money). I'm kinda forced to do that and maximise
I'd rather invest the money in buy-to-lets than the weird ETF a pension is, but then I would lose 40% of my money to the government.
Being employed in the UK is not very convenient over 50-70k (and it becomes especially painful at 100-120). You are always better as a contractor outside of IR35 with your own limited company, unless some of the benefits make it worth it (eg. long paid m/paternity leave, stock options you really care about).
Unfortunately being outside IR35 is getting more complicated, corporate tax rate is increasing and buy-to-lets lost some of the tax advantages they had.
Overall if I had to pick a country with bad weather to make money in, I'd go with Switzerland instead of the UK.
Tbf your income is also very not normal. The article is a much more typically family income - their combined income is still less than your individual income by 50k! Because they are two people, they’re doubling up on things like the 401k deduction.
You make far, far more than them.
The “average” American would be able to get pretty close to what the article is doing.
But probably shouldn’t and won’t because you can also see they’re leaving a pitiful amount for themselves to live on in the moment.
on $209k salary or £148k, here in UK the total tax is £46,632 and £6,838 for National Insurance. So about 36% which is almost the same as California. Source: https://www.thesalarycalculator.co.uk/salary.php
I... usually hear this sentence sarcastically... but here it really seems as if the author isn't using it as such. I dunno, if you're a proponent of Starve The Beast [0], this is a consistent belief I suppose.
Holy shit, $500 a year for health insurance? I pay twice that a month and don't even get an HSA option.
Seems weird to put so much into retirement funds if your plan is to retire in your 30s, the penalties of touching that before 60 are pretty substantial.
I suspect there's some sort of inheritance of property or something they're not disclosing.
No, It's $500 + $6,450 so $580 a month plus an unspecified employer contribution. Because it is a HDHP with an HSA though they are incentivized to keep their costs in check and anything they don't spend of the $6k gets rolled over to the next year and once you hit retirement if you have a surplus at retirement age you can use the money like an IRA.
HSA has nothing to do with the quality of the insurance plan btw. HSAs are only available in conjunction with HDHP (High Deductible Health Plan). Typically, HDHPs are Bronze level plans that don’t provide a good coverage (which is why HSAs are allowed to supplement such plans).
Good on the author for making use of these tax benefits. I don't see anything out of the ordinary here. For govt workers, the 457 benefit seems really nice. Having kids in an LCOL area seems to be very doable. I imagine the same article but for 10x the income would be "interesting".
As a side note, it's worth indicating that if you work at FAANGs and other types of companies, you can use the mega backdoor Roth IRA method [1] to put up to $38k away in retirement accounts a year.
I’m always amazed that people think 401(k)s are a great idea. Yeah, that’s exactly what I want, the government telling me how I can spend my money, until I’m almost ready to die, with no guarantee the laws governing 401(k)s won’t change along the way, or that some moron politician won’t siphon from my retirement.
401(k)s are privately managed. They were originally designed as a technique to replace pensions, and are separate from government-mandated savings like Social Security. How would a politician siphon from your retirement? A 401(k) is basically just an IRA that a company manages for you and pays someone to administer so that the deferred tax burden can happen. Or do you mean that in the future, taxes may go up? If that’s your belief, nothing prevents you from using a Roth 401(k) if your company offers it (my previous 2 employers both offered this).
They are just deferring taxes. Taxes will be paid anyway in the future.
In some ways I prefer to pay taxes now because you are free with your money and that is wealth in itself. A new crazy Bernie comes and changes the rules and you are f*ck$d with 30-40% of your savings disappearing in days by inflation, formal currency devaluation, new taxes and so on.
E.g If I were living in Peru today I will fly with my money as soon as possible with the new communistic guy in charge. Just hearing him talk in the past would be enough to take the decision.
[+] [-] imajoredinecon|4 years ago|reply
Calling this "Houdini-like" (author's words) tax hacking seems like a bit of a misunderstanding of deliberate social policy!
[+] [-] chooseaname|4 years ago|reply
An awful lot of families are doing this on 1/3 of that amount.
[+] [-] dehrmann|4 years ago|reply
This could be anywhere between solidly upper middle class to struggling to make ends meet depending on where you're at in the US.
[+] [-] duped|4 years ago|reply
[+] [-] sbeller|4 years ago|reply
In 2013 150k seemed a lot IIRC as the economy was in shambles and all those paid with these sweet RSUs and ISOs weren't having it.
[+] [-] masklinn|4 years ago|reply
It's more than double the median household income.
[+] [-] oliwarner|4 years ago|reply
I wish kids were deductible in the UK. We get a tax free allowance on the first £25k (combined earnings) and that's clawed back over £100k.
[+] [-] RobRivera|4 years ago|reply
noone is beholden to pay more taxes than the tax code requires.
anyone who uses emotional appeal to say otherwise wont help me when i need their help anyway so they can pound sand.
[+] [-] knz_|4 years ago|reply
[+] [-] SavantIdiot|4 years ago|reply
#1. 401k.
While this is a great idea, if he's trying to retire at 33, putting 17.5k away from his 70k paycheck is not going to help because he can't touch it until he is 59.5 (w/o penalty).
#2. Capital losses
Tax-loss harvesting means selling securities that are underwater to get a capital-loss deduction. I don't know where to start explaining why this is such a bad idea. I'll pick the two most compelling reasons why this is dumb. First, you can only do this so many times before you've whittled your investment to zero. Second, you are violating the most basic principle of standard-person (non-rich) investing: buy and hold.
That's all he's got in his back o' tricks.
What an awful post.
[+] [-] stu2b50|4 years ago|reply
That's not quite true. With 5 years of preplanning, you can get money out of a 401k without any penalty at any age (although, you will of course pay taxes on it) by doing a backdoor Roth IRA ladder.
[+] [-] jamesmeador|4 years ago|reply
[+] [-] pembrook|4 years ago|reply
Say you own VTI, a total US market etf. Then the stock market drops 20% next week.
You can sell VTI and with the proceeds immediately buy VOO (s&p500 etf) within seconds.
VOO and VTI are insanely correlated, so you’ve basically triggered a 20% loss for tax purposes, without actually selling any of your exposure.
That said, it’s not as big of a value as you might think, since you’ve also stepped down your basis, and need to pay more capital gains taxes when you sell since you “bought” at a lower price now.
Generally accepted wisdom is to TLH up to the yearly loss deduction amount (like 3k or so) and stop.
[+] [-] occz|4 years ago|reply
It's not strictly speaking incompatible with buy-and-hold, from my perspective. I'm not an expert though, I don't even live in the U.S.
[+] [-] tingletech|4 years ago|reply
[+] [-] dehrmann|4 years ago|reply
The other giant caveat is they merely deferred taxes on $46,000.
[+] [-] hiram112|4 years ago|reply
- Income from employer: $168K
- Investment income: $41K
- Total income: $209K
Deductions (rounded numbers):
- $19.5K (private retirement 401k)
- $12.5K standard deduction
- $3.5K health care savings
- $3K MEME stonks losses :(
Approximate taxable income after deductions: $170K
Taxes paid:
- Federal Income tax: $32K
- Federal Social security (gov't pension / disability insurance): $8500
- Federal Medicare (gov't old age health care): $2500
- State Taxes: $10K
Total taxes: $53K
So I'm looking at about 25% taxes due. Also, my employer had to match my federal Social Security and Medicare (which is essentially taken out of my pay), so it's closer to about 31%.
That's certainly better than what (it sounds like) you guys pay over in the UK, EU, etc, especially as my salary over there would be taxed in one of the higher brackets, while in the US, I'm in the "middle", though I have very few deductions that larger families will have (especially if they own a very big house in an expensive state).
In high tax states like California, you would add another 4-5% or so - you'd end up at 35%.
[+] [-] jokethrowaway|4 years ago|reply
The disadvantage of using a pension is that I won't get that money until I'm 60 (and they keep increasing the age where you can withdraw money). I'm kinda forced to do that and maximise I'd rather invest the money in buy-to-lets than the weird ETF a pension is, but then I would lose 40% of my money to the government.
Being employed in the UK is not very convenient over 50-70k (and it becomes especially painful at 100-120). You are always better as a contractor outside of IR35 with your own limited company, unless some of the benefits make it worth it (eg. long paid m/paternity leave, stock options you really care about).
Unfortunately being outside IR35 is getting more complicated, corporate tax rate is increasing and buy-to-lets lost some of the tax advantages they had.
Overall if I had to pick a country with bad weather to make money in, I'd go with Switzerland instead of the UK.
[+] [-] stu2b50|4 years ago|reply
You make far, far more than them.
The “average” American would be able to get pretty close to what the article is doing.
But probably shouldn’t and won’t because you can also see they’re leaving a pitiful amount for themselves to live on in the moment.
[+] [-] andrejguran|4 years ago|reply
[+] [-] ggregoire|4 years ago|reply
Can someone explain that sentence? What's "patriotic" about paying less taxes?
[+] [-] remexre|4 years ago|reply
[0]: https://en.wikipedia.org/wiki/Starve_the_beast
[+] [-] MattGaiser|4 years ago|reply
[+] [-] kleinapple|4 years ago|reply
[+] [-] ksherlock|4 years ago|reply
[+] [-] bingidingi|4 years ago|reply
Seems weird to put so much into retirement funds if your plan is to retire in your 30s, the penalties of touching that before 60 are pretty substantial.
I suspect there's some sort of inheritance of property or something they're not disclosing.
[+] [-] pmorici|4 years ago|reply
[+] [-] stu2b50|4 years ago|reply
[+] [-] poundofshrimp|4 years ago|reply
[+] [-] walshemj|4 years ago|reply
[+] [-] yowlingcat|4 years ago|reply
As a side note, it's worth indicating that if you work at FAANGs and other types of companies, you can use the mega backdoor Roth IRA method [1] to put up to $38k away in retirement accounts a year.
[1] https://www.nerdwallet.com/article/investing/mega-backdoor-r...
[+] [-] walshemj|4 years ago|reply
This does assume your COL (with three kids) is so low you can max out all your pension
[+] [-] unknown|4 years ago|reply
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[+] [-] aynyc|4 years ago|reply
[+] [-] denimnerd42|4 years ago|reply
[+] [-] andrewmcwatters|4 years ago|reply
[+] [-] lukevp|4 years ago|reply
[+] [-] Mathnerd314|4 years ago|reply
[+] [-] ianhawes|4 years ago|reply
[+] [-] jamesmeador|4 years ago|reply
[+] [-] bumbada|4 years ago|reply
In some ways I prefer to pay taxes now because you are free with your money and that is wealth in itself. A new crazy Bernie comes and changes the rules and you are f*ck$d with 30-40% of your savings disappearing in days by inflation, formal currency devaluation, new taxes and so on.
E.g If I were living in Peru today I will fly with my money as soon as possible with the new communistic guy in charge. Just hearing him talk in the past would be enough to take the decision.
[+] [-] AndrewGaspar|4 years ago|reply
[+] [-] itsdrewmiller|4 years ago|reply
[+] [-] tingletech|4 years ago|reply
[+] [-] tingletech|4 years ago|reply
[+] [-] unknown|4 years ago|reply
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[+] [-] Endemaj|4 years ago|reply
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[+] [-] tick_tock_tick|4 years ago|reply
Contrary to a lot of narratives at-least at the federal level it is almost completely funded by the "rich".
Now at the local level we can have a different discussion about regressive taxes like sales, gas, etc.