Hi,
I’m wondering whether the title includes the exhaustive list of investment vehicles that can cut down an individual’s earned income.
If so, can someone please explain the why behind the govt. limiting deductibility by contribution to a certain MAGI threshold? I guess at a certain point it makes no sense to use a traditional IRA, just backdoor it to a ROTH, right? But I fundamentally don’t understand why being above a certain MAGI should disqualify the deductions…
Trad 401(k); Trad IRA; HSA — Any other vehicles to cut down earned income for a W-2 worker?
byu/Interesting_Week_917 intax
Posted by Interesting_Week_917
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The original intent was to help lower earners more than higher earners. The Roth backdoor came out by accident – the intent was to have high earners choose either 401k or Trad IRA and that’s it.
And to answer your question: yes, that’s pretty much it. There are some esoteric things that W2 earners can do (mainly through running a short-term rental) but they’re not generally a good answer.
If you’re self-employed, or if your employer is willing to help you out, you have a few more options. You can stuff out the employer side of your 401k, or use a defined benefit pension. But those are also uncommon for W2 workers.
Mostly, if you’re W2 and a high earner, the answers are just the normal life stuff: get married, get a mortgage, etc.
Yes, more or less.
>If so, can someone please explain the why behind the govt. limiting deductibility by contribution to a certain MAGI threshold? I guess at a certain point it makes no sense to use a traditional IRA, just backdoor it to a ROTH, right? But I fundamentally don’t understand why being above a certain MAGI should disqualify the deductions…
The idea from a public policy perspective is to try to avoid a situation where we are only providing tax kickbacks to rich people who save for retirement. This is why the dollar amount of deductions is limited, why certain types of contributions phase out, why there is ERISA nondiscrimination testing for 401(k)s, and why there have been proposals recently to replace the deduction with a tax credit that is a fixed (or declining) percentage of the contribution.
Rather than looking at it from a “how do I cut down earned income” perspective, the correct approach is to define your goals then determine the most effective way to achieve them. The easiest way to cut down your earned income is to quit your job, but that’s probably not in line with your goals.
A lot of times, someone achieving financial goals involves earning income and paying taxes on that income. You’re benefiting from the lowest income tax rate in generations.
No – you covered the easy three. But should that be impetus for you to not earn more? That would be a crazy logic failure. So you earn more, and pay more in taxes while your wealth GROWS. And you are forced, e-gads, to consider a taxable brokerage or tax-advantaged tools like i-bonds or safe CD savings or a 529 for your spawn or donate to your charity-of-choice, or pay off your debts, or just have more money.
Many will envy your math problem.