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 » Thu Aug 23, 2018 9:04 am

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 Does it make more sense, at this income level, to just put my money in a ROTH IRA, where is can more easily be withdrawn?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 » Thu Aug 23, 2018 12:32 pm

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

Post by Kriegsspiel » Thu Aug 23, 2018 12:33 pm

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Does it make more sense, at this income level, to just put my money in a ROTH IRA, where is can more easily be withdrawn?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 » Thu Aug 23, 2018 1:39 pm

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 » Thu Aug 23, 2018 6:39 pm

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 » Fri Aug 24, 2018 2:29 pm

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.

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

Post by Augustus » 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, but the trade off is that you lose access to the money until you're in your 60s. Losing access may be a good thing depending on your personality, if you're worried you'll spend it. Since you're low income there doesn't appear to be any tax benefits. Roth will be helpful if your income is going to be high in your 60s, not sure how likely that is though.

I keep my money in taxable accounts, if you don't sell it or receive dividends you don't get taxed afaik, since I'm a buy and hold type it works well for me. My plan revolves around living off the dividends/rent in the next few years, so putting it in retirement accounts would be detrimental for me.

What would be beneficial to you is taking business losses, this would reduce your taxable income wrt self employment taxes. Just be careful and make sure you're legal.
Last edited by Augustus on Sat Aug 25, 2018 12:57 pm, edited 1 time in total.

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

Post by Chris » Sat Aug 25, 2018 12:54 pm

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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