Where Can I invest my money after 166K

[jc3900]

Ok, So I think I have most of the differences between a traditional IRA and a Roth IRA down, however what investment vehicle do I use if I have a family and make over 166K in MAGI or if I max out the Roth IRA or Traditional IRA?

[humandraydel]

Tax efficient investing in a taxable account.

[jc3900]

humandraydel: can you expand on that a little further.

[JBinKC]

I think what he is saying is to construct a portfolio that will emphasize returns from capital gains 1 year out.

[humandraydel]

The goal is to minimize the amount of taxes you pay, because taxes really can take a BIG bite out of your returns in a taxable account. You trigger taxes on capital gains whenever you (or the mutual fund you own) sells shares. Most mutual funds trade too often and the capital gains must be passed on to the investors, triggering taxes.

But, there are tax-managed mutual funds whose goal it is to minimize the tax bill for shareholders. Vanguard has a Tax Managed Small Cap Fund, a Tax Managed International Fund, as well as others. Another option, a Total Stock Market Index is really as tax efficient as you can get, since the index never needs to sell stocks (and trigger taxes).

Another important point is to keep your most tax inefficient investments such as bonds and REITs in some sort of tax advantaged account (401k, IRA, etc). If you need more bonds than you can fit in your tax advantaged accounts, you can look into municipal bonds.

The bottom line: the most tax efficient investment is buying a Total Stock Market Index and not selling it for 30 years, thus deferring taxes on 30 years of capital gains, much in the same way taxes are deferred in an IRA.

[jIM_Ohio]

MAGI is before deductions, I think.

Add more to 401k
Contribute to an HSA
have a high mortgage and deduct the mortgage interest

this should reduce taxable income and allow eligibility for a Roth.

If that does not work, look to do a few things
a) pay off mortgage
b) invest in taxable brokerage accounts. Taxes are 15% for dividends and long term capital gains. Usually taxes are 15-25-28% if taken out of a traditional IRA.
c) contribute to spouse's 401k as well

[moneybags]

MAGI is before deductions, I think.

Add more to 401k
Contribute to an HSA
have a high mortgage and deduct the mortgage interest

this should reduce taxable income and allow eligibility for a Roth.

This mortgage piece won't work. AGI is before itemized deductions. Also, itemized deductions are reduced for higher earners, so adding more deductions doesn't mean you get to take them all.

The 401K part works, assuming you aren't already maxing it out.

[jc3900]

How do taxes work in a 401k? Assuming you meet the employ match, is there any incentive to me to contribute past that? Are there any special tax benefits gained from using a 401k?

[sweeps]

How do taxes work in a 401k? Assuming you meet the employ match, is there any incentive to me to contribute past that? Are there any special tax benefits gained from using a 401k?

Your earned income is reduced by the amount that you put in your 401k, regardless of the company match.

For example, if you earn $100K and you contribute $10K to your 401k, then your W2 will only show $90K of income.

[jIM_Ohio]

How do taxes work in a 401k? Assuming you meet the employ match, is there any incentive to me to contribute past that? Are there any special tax benefits gained from using a 401k?

Sweeps got the answer right, but to add more-

Look at a paycheck calculator site:
Payroll-Taxes.com - Paycheck Calculators

If you make 100k and put 10% into 401k the government taxes only the 90k you take home.

If you assume salary of 100k, 10% 401k, and bi weekly paychecks...

10% 401k:
Bi-weekly
Gross Pay $3,846.15
Federal Withholding $511.82
Social Security $238.46
Medicare $55.77
Ohio $139.54
401(k) Plan $384.62
Net Pay $2,515.94

0% 401k:
Bi-weekly
Gross Pay $3,846.15
Federal Withholding $607.98
Social Security $238.46
Medicare $55.77
Ohio $160.21
Net Pay $2,783.73

Notice the 401k contribution is $380 plus, but take home pay only dropped $270 because of the contribution.

Run similar examples with 6% and 7% top see how an incremental percentage drops take home pay by only a fraction.

I contribute 11% to 401k now. My next raise will bump this up to 12%. raise after that 13%- implying I will save a portion of my raise each year by deferring taxes on it and growing it in 401k.

[humandraydel]

Unless your choice of 401k funds is absolutely horrible, it's usually best to max out the 401k before investing in a taxable account. The ability to defer taxes and therefore compound gains on a higher investment is well worth it. I had assumed you had already maxed out all tax advantaged accounts, in which case the next best thing is tax efficient investing.

[fake_usa]

Look at a paycheck calculator site:
Payroll-Taxes.com - Paycheck Calculators

Great Site!!

Thanks,

[bjl584]

A bit off subject, but...jc, didn't you state in a different thread that you are 18? I find it odd that you have a family and earn over 166K. Unless of course you are just inquiring because you are curious.