I didn’t stop blogging, I’m just on a four-week vacation around the East. Also, happy 2018 and 2-year blogversary. My wife an I have had income that put us in the 15% or 25% tax bracket for the past years. After the MBA our combined income should put us in the 22% bracket for the near future. Since this year the only income we earned was from my summer internship, it meant we would have to pay nothing after the standard deduction and personal exemptions. However, that left room in low tax brackets. If we could find a way to earn more income then it would only be taxed at 10%, which is a pretty good deal. However, there weren’t any easy ways I could think of to earn income while abroad so we went another route.
I had a 401(k) from my old employer which I should have been investing aggressively, but I’m dumb. I had placed it in very conservative investments yielding 1-2% expecting a stock market correction. Instead, the market has gone up I decided to rollover my 401(k) into an IRA to give myself more options. However, it was also necessary in order to do an…
At the same time as the rollover I did a conversion. The 401(k) is before-tax funds, so in order to convert them to after-tax funds I have to…pay taxes. Why is this important? Well, you treat the conversion as income which was useful in years where you have little to no income; 2017 was that for me. Most will leave these funds until they retire anticipating that their income will be lower in retirement, which is generally the case. I would like to build passive income streams, so I’m not sure if my retirement income will be below a 15% tax rate. It is ambitious and there are no guarantees, but the future is uncertain, so you have to guess.
This opportunity to pay a potentially lower tax rate only occurred because I started saving for retirement as soon as possible. I recommend the same to everyone. Furthermore, I have finally shifted to an aggressive portfolio since that historically outperforms over the long-term, which is when retirement will occur. I’m glad I finally overcame the fear of short-term loss for the benefit of the long-term.