Social Security And Tax-Advantaged Retirement Accounts For Low Income Earner

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RusticBohemian
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Social Security And Tax-Advantaged Retirement Accounts For Low Income Earner

Post by RusticBohemian »

Hi.

I don't earn much taxable income - last year my Federal Adjusted Gross Income was $7,226, leaving me to pay $745 in federal taxes. I'm self employed, so there's no employer paying half of my social security taxes.

I have two questions regarding this.

1) Investments in my IRA didn't seem to reduce my tax burden. How much do you have to earn before investing in an IRA actually does something? Does it make more sense, at this income level, to just put my money in a ROTH IRA, where is can more easily be withdrawn? Or maybe just use Taxable accounts?

2) At this income level, is the money I'm earning still counting toward social security credits? I know you need a certain number of years to qualify for distributions, but I'm not sure if I'm earning enough to meet those targets.

Thanks!

Kriegsspiel
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Re: Social Security And Tax-Advantaged Retirement Accounts For Low Income Earner

Post by Kriegsspiel »

RusticBohemian wrote:
Thu Aug 23, 2018 9:04 am
1) Investments in my IRA didn't seem to reduce my tax burden. How much do you have to earn before investing in an IRA actually does something?

Kriegsspiel
Posts: 880
Joined: Fri Aug 03, 2012 9:05 pm

Re: Social Security And Tax-Advantaged Retirement Accounts For Low Income Earner

Post by Kriegsspiel »

What do you mean by "didn't seem to" lower it? Either it did or didn't. If you contributed to a traditional IRA, then it would lower your taxable income. Now, do you mean $7,226 was your taxable income (AGI minus your standard deduction) or was that your AGI? Assuming you meant taxable income, keep in mind that the standard deduction is now $12,000, so you wouldn't have any taxable income assuming nothing changes. Traditional IRAs don't have an upside if you don't have any taxable income. Also, I believe you can now shield 20% of your self employment income under section 199A.
Does it make more sense, at this income level, to just put my money in a ROTH IRA, where is can more easily be withdrawn? Or maybe just use Taxable accounts?
If you have taxable income, I'd say put it into a traditional IRA, then convert it to a Roth when you are in retired in the 0% or 12% tax bracket. If you don't have any taxable income, put it in a Roth.
2) At this income level, is the money I'm earning still counting toward social security credits? I know you need a certain number of years to qualify for distributions, but I'm not sure if I'm earning enough to meet those targets.
$1,320 qualifies for an SS credit, you can earn up to 4 a year. You need 40 total credits to get SS when you're old enough.

IlliniDave
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Re: Social Security And Tax-Advantaged Retirement Accounts For Low Income Earner

Post by IlliniDave »

That's because for a single filer under the new law you don't pay any income tax on the first $12,000 you earn, just SS and Medicare (so-called payroll taxes). Pre-tax retirement deductions don't lower SS and Medi tax, only income tax. If you have access to an HSA you can invest money in it and lower payroll taxes I believe.
Last edited by IlliniDave on Thu Aug 23, 2018 6:46 pm, edited 1 time in total.

classical_Liberal
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Re: Social Security And Tax-Advantaged Retirement Accounts For Low Income Earner

Post by classical_Liberal »

With earned income that low you could also potentially qualify for Earned Income Tax Credits, depending on family size. Reducing your earned income could reduce that credit, hence causing a higher tax burden.

Paula
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Re: Social Security And Tax-Advantaged Retirement Accounts For Low Income Earner

Post by Paula »

The tax you paid is self employment tax. There is no way around it. See Schedule SE then see where Other Taxes are entered on form 1040. They are below the Credits section so no amount of IRA deduction will help, regardless of your self-employment income amount.

Chris
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Re: Social Security And Tax-Advantaged Retirement Accounts For Low Income Earner

Post by Chris »

Augustus wrote:
Sat Aug 25, 2018 12:45 pm
Is there a benefit to using retirement accounts? The only benefit I know of is reducing tax burdens
There's also the benefit of protecting the money from creditors, depending on your state.

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