I’ve been following this thread for awhile, but haven’t posted before. We have a dilemma I’d like your feedback on. Let me preface by saying we’ve already spoken to a CPA and FA who have different opinions, which is making this very confusing for us.
DH is self-employed with a few employees and has had a SEP set up for years. CPA thinks he should switch to a 401k for the business. Advantages: we can put more into the 401k than the SEP; more tax savings; less has to be contributed to employees. Disadvantages: administrative costs while the plan is active.
On its face, it seems like a no-brainer, at least in the short-term. Our concern, and the concern of the FA, is that at 70.5 we will have a significant RMD. We’d have one anyway because most of our assets are in the SEP, but it would be even greater by putting the money into the 401k now. The FA thinks it might make more sense to put money into a tax-efficient taxable account that would give us more flexibility in retirement than the 401k would.
Is it better to get the savings now and deal with the consequences later (e.g., we could spend down some of the SEP in the earlier years of retirement before taking SS and/or convert some to a Roth, altho we’ll still have the RMD) or pay more in taxes now, put less into retirement and maintain some flexibility in retirement.
I should add that DH is 60 and plans to work for only 2-3 more years.
To me, it’s not just numbers. The effort to covert to new system and get used to it and trouble shoot if anything goes wrong that seems to come with any change should also be considered imo.
“Cbreeze, you know quite a few young people who make over $10 million a year and don’t pay state income taxes, property taxes or have charitable contributions that add up to a little over $12,000+ a year if they are married and $6,000+ a year if they are single?”
Itemized deductions phase out - after a certain income, they drop to below standard deduction. The income does not have to be 8 figures for this to happen.
Itemized deductions phase out at 3% of your income over $300K-ish if you are married filing joint, $250K-ish if single, up to 80%.
So if you have $100K in itemized deductions affected by the phaseout (largely taxes, interest, and charitable deductions), you can lose $80K of them, which would take an income of $2.667 mil over the limit.
You always get to keep a minimum of 20% of your itemized deductions, which could be less than the standard deduction if you live in a state with no income tax and don’t have a mortgage or own any real estate.
The personal exemption phaseout takes only $125K of income over the limit (which is the same as for the itemized deduction phaseout) to lose it all.
I’m traveling, so it’s a quick response:
Shellfell, ask them to show you the numbers. Admin costs may not be that much until assets exceed $250K with annual report filling req.
Also, are they suggesting prototype plan at someplace like Vanguard or Fidelity? Admin may be easier with canned plan.
That Bogleheads post is one of the best I’ve ever read in that forum. I sent it to both of my kids. Hope they take it to heart! Thanks for the link, IxnayBob.
I thought the Bogleheads speech/article was excellent – especially what follows the initial four points quoted above. Its real focus was on how to accumulate net worth. I would have a lot more to say than the first four points about success in careers/life. And, on net worth, his focus on getting an inexpensive education makes sense generally but especially if your audience is at Arizona State (which incidentally is one of the more innovative universities in the country) but might make less sense for the tippy-top kids. I suspect that the ROI at Stanford GSB or HBS is likely pretty high though (not clear how good this is as a analysis but here is one: http://www.businessinsider.com/business-schools-with-the-best-roi-2014-8).
I really like the idea of living abroad in a warm place for part of the year and have investigated a few places. Taxation is a potential issue – if you are a US taxpayer, you need to file with the IRS on your worldwide income whether you live in the US or not. Also, I do think that health care is a real issue in some locations (e.g., Mexico). The rankings say that Panama’s health care system is excellent and it may be and Chile’s no doubt is, but Nicaragua’s is undoubtedly not. That said, the US health care system isn’t as good as Americans think it is (except likely at top academic medical centers where they are great at solving problems that have already arisen but are probably not nearly as good as in other countries at preventing things. The US health care system was ranked 11th out of 11 developed nations (see http://www.commonwealthfund.org/publications/fund-reports/2014/jun/mirror-mirror) or 37th in the world by the WHO (see http://www.nejm.org/doi/full/10.1056/NEJMp0910064 or http://en.wikipedia.org/wiki/World_Health_Organization_ranking_of_health_systems_in_2000). Since I don’t plan to retire but to keep on working, I need to be near a good airport. Some of the places on those lists, like Uruguay are pretty far away from the rest of the world (though it is a very civil country). Language is a real consideration. In a lot of countries, it is either good or nearly mandatory to speak the local language. ShawWife is not so strong on languages she didn’t learn to speak as a child. We say that she speaks Foreign, which is a mixture of English, French and random words from various languages, mixed with hand gestures.
My parents initially retired to Ibiza, in the mid-70s before it became insanely popular, and lived in an affordable but exquisite farmhouse. They returned because of the medical care. My impression is that today, the medical care in Spain is as good as that in the U.S.
Unless you have an EU passport, retiring in EU countries for 12 months of the year is difficult. I have been procrastinating, but really need to see about getting EU citizenship. Canada is no easier. Australia is wonderful, but it is such a long flight (get a move on, Musk and Branson!), unless the kids disperse as they settle into adulthood. Otoh, one child is in California, so it’s already not possible to live near all of them.
@shawbridge, my parents had a friend worse than your wife; they said she spoke 7 languages, but none of them fluently
