Tax Planning: Saver's Credit
Dec. 29th, 2018 05:03 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
livingdebOnce again I am going to manipulate my finances for tax savings like rich people do, only by simulating a poor person. (Unlike the time I did this in 2015, I will still be paying some income taxes this year, as I should.)
It all started when I fantasized about contributing more to my Roth IRA this year.
Earned income
I have contributed the maximum to a Roth IRA every year that I have worked since Roth IRAs were invented. Unfortunately, you can only contribute to a Roth IRA if you (or your spouse) has earned income within a certain range. The top end of that range is not on my radar. But at the bottom end, you can't contribute more than you have earned. And money from pensions, interest, and dividends do not count as earned. So I thought my contributing days were over. But this year, I worked a few jobs. In fact, I worked so much that I actually earned a little more than the maximum contribution, including the catch-up provision for older people, of $6,500. (Although I didn't actually take that much home after taxes.)
Stocks
The whole point of working was to have more money available to spend, not less. But then it occurred to me that I could make my contribution by transferring some of my stocks from my taxable account to my IRA.
Saver's Credit
Out of curiosity, I looked up the cutoffs for the Saver's Credit again. And for 2018, if your Adjusted Gross Income is less than $32,000, then if you contribute to certain retirement accounts, you qualify for a credit for a certain percentage of your contribution up to $2,000. In other words, if my AGI is below $32,000 and I contribute at least $2000 to my IRA, I would get a $200 credit.
So I calculated my income and it's just over $32,900.
Traditional IRA
However, I can reduce my AGI by contributing to a traditional IRA, so I created one.
And I found out that I cannot just transfer stocks from my taxable account to my IRAs. And if I sell my stocks first and transfer the money, well, I've held my stocks so long that most of the current value is from capital gains, and thus would be added back to my AGI. (I feel like I'm in Laurel and Hardy scene, only a boring financial one.)
So I just funded my traditional IRA with $1200 from savings. (This gives me a little wiggle room in case my calculations are off, plus the minimum to open an index fund at Vanguard is $1,000, though I could have just left it in cash.)
I had already contributed $1000 to my Roth IRA, so I can get that 10% back on the maximim allowable amount of $2,000, for a total credit of $200.
Maxing the IRA contribution
Next year, I have the whole first quarter to continue contributing to my 2018 IRAs, so I could sell the stocks then (adding to my 2019 income), transfer the money to my Roth IRA, and then re-buy the stocks, hoping any price increase during that period doesn't hurt me too much. On the plus-side of risk, cashing in on some of my capital gains now, while I'm in the 0% capital gains tax bracket, could save me money over doing so later in a possibly different tax environment, such as where capital gains are taxed the same as other forms of income.
But then I vaguely remembered learning that if you re-buy the same or similar stock (or fund) right away, then it doesn't count as a long-term capital gains anymore. So I tried looking that up and it turns out I was (probably!) thinking about the "wash sale" rule, which only applies when you sell at a loss and then re-buy within 30 days. So that won't apply to me.
So that's all cool. And I can rollover my new traditional IRA into my old Roth IRA at any time later and pay the taxes on that $1200 (or however much it is at that time). So I'll probably watch for a market drop during the beginning of the year and do it early in the year regardless.
It all started when I fantasized about contributing more to my Roth IRA this year.
Earned income
I have contributed the maximum to a Roth IRA every year that I have worked since Roth IRAs were invented. Unfortunately, you can only contribute to a Roth IRA if you (or your spouse) has earned income within a certain range. The top end of that range is not on my radar. But at the bottom end, you can't contribute more than you have earned. And money from pensions, interest, and dividends do not count as earned. So I thought my contributing days were over. But this year, I worked a few jobs. In fact, I worked so much that I actually earned a little more than the maximum contribution, including the catch-up provision for older people, of $6,500. (Although I didn't actually take that much home after taxes.)
Stocks
The whole point of working was to have more money available to spend, not less. But then it occurred to me that I could make my contribution by transferring some of my stocks from my taxable account to my IRA.
Saver's Credit
Out of curiosity, I looked up the cutoffs for the Saver's Credit again. And for 2018, if your Adjusted Gross Income is less than $32,000, then if you contribute to certain retirement accounts, you qualify for a credit for a certain percentage of your contribution up to $2,000. In other words, if my AGI is below $32,000 and I contribute at least $2000 to my IRA, I would get a $200 credit.
So I calculated my income and it's just over $32,900.
Traditional IRA
However, I can reduce my AGI by contributing to a traditional IRA, so I created one.
And I found out that I cannot just transfer stocks from my taxable account to my IRAs. And if I sell my stocks first and transfer the money, well, I've held my stocks so long that most of the current value is from capital gains, and thus would be added back to my AGI. (I feel like I'm in Laurel and Hardy scene, only a boring financial one.)
So I just funded my traditional IRA with $1200 from savings. (This gives me a little wiggle room in case my calculations are off, plus the minimum to open an index fund at Vanguard is $1,000, though I could have just left it in cash.)
I had already contributed $1000 to my Roth IRA, so I can get that 10% back on the maximim allowable amount of $2,000, for a total credit of $200.
Maxing the IRA contribution
Next year, I have the whole first quarter to continue contributing to my 2018 IRAs, so I could sell the stocks then (adding to my 2019 income), transfer the money to my Roth IRA, and then re-buy the stocks, hoping any price increase during that period doesn't hurt me too much. On the plus-side of risk, cashing in on some of my capital gains now, while I'm in the 0% capital gains tax bracket, could save me money over doing so later in a possibly different tax environment, such as where capital gains are taxed the same as other forms of income.
But then I vaguely remembered learning that if you re-buy the same or similar stock (or fund) right away, then it doesn't count as a long-term capital gains anymore. So I tried looking that up and it turns out I was (probably!) thinking about the "wash sale" rule, which only applies when you sell at a loss and then re-buy within 30 days. So that won't apply to me.
So that's all cool. And I can rollover my new traditional IRA into my old Roth IRA at any time later and pay the taxes on that $1200 (or however much it is at that time). So I'll probably watch for a market drop during the beginning of the year and do it early in the year regardless.