32 thoughts on “How I Kicked Uncle Sam’s @$$!

  1. I love your tax strategy.
    I have a question. Do you have both a Roth IRA and a traditional IRA? and if you don’t , can an individual have both simultaneously?
    Keep writing the wonderful content.
    Thank you.

    • Amit –

      Thank you for the comment! I do actually have both. If you already know the tax-situation you’ll be in and know that you’ll be able to contribute to a traditional IRA – then do that to the maximum that you think you can. If you know you will be phased out of doing that – then go to the roth! What I plan to do this year, is that I know I’ll have to do at least “some” to a Roth IRA; but will wait, more than likely, until April of 2018 to make my contributions to any IRA account – just to be on the safe side of which account I am allowed to do within IRS limits. Your MAGI – once that starts to rise, will start to phase you out of being allowed to contribute to a traditional IRA. To answer your question, though, you can have both : )


  2. Great stuff Lanny! I expect nothing less from a tax accountant like yourself. I am currently putting about 13k into my 401k, 2500 into my HSA and have been maxing out my ROTH IRAs. The reason for the ROTH IRA is that I believe I will soon be out of the lower tax brackets so I am taking advantage of this right now while giving uncle sam a little more than he wants. Soon I will be all traditional and back dooring into a roth!

    • Stefan –

      AWESOME. Right there, alone, is $15.5 pre-tax + $5,500 post-tax retirement i.e. $21K that you are putting away in tax-advantaged accounts. Think about the milestones you are making and the dent in the journey you’ve come so far. It’s awesome to hear this news. Keep it up SS, talk soon.


  3. Maxing out the tax-advantaged accounts is huge. Gotta love the 401k and the HSA. I would do a trad IRA if I could but I’m just outside the income range so I go with the ROTH IRA and it helps to have a little bit of tax diversification on that end as well since who knows where taxes will actually be 10-20 years from now.

    • Time –

      Yep. I have to “bifurcate” between the roth and traditional; and have to do more in the Roth this year, as opposed to traditional. Play the cards that you know now (i.e. you are allowed pre-tax items now, and that could always change), and we are smart enough to figure out what to do later!


  4. Being from Belgium with a tax rate of 34pct, I can only say…job well done!

    Our countries tax systems and social benefits are different, so it is hard to compare. Maxing out pre tax investments is a no brainer to me!

    • Amber –

      Yes, very different! Here in the states we have brackets based on income levels and the way to reduce your tax burden is to simply reduce your income and the best way to do that is pre-tax investments such as the 401(k), Health Savings Account & Traditional IRA, if you are able to. You are able to build your balance sheet and reduce expense in the current period at the same time : )


  5. Hey Lanny,
    What other factors did you have when switching from Roth IRA to traditional or was it specifically for tax? I use a Roth to diversify my investment accounts in retirement, as for me right now they are the only ones I have. I’m the younger of the two Dukes, so hoping to get to the outside retirement account wealth level one day.

    My thoughts are if I’m using 18K pre-tax, this means in retirement I’ll be paying taxes it on it later. If I use a Roth as well, then some of my income will be tax free -> balance it out. I’ll also have non sheltered retirement accounts by then also.

    Could you give some thoughts on your decision process and any other big learnings you had?

    Thanks !
    Master Duke

    • Master Duke –

      Of course. Here is the big item – Conversion to the Roth with your pre-tax accounts. If you want to retire early, there are chances you have other sources of income that are offset by business expenses. When you go “full” blown no more corporate world – your tax bracket will more than likely be lower. In my current bracket – I pay 25% taxes on income > $37,650. However, when I retire early, I may be in a MUCH LOWER tax bracket. Then – you convert $x from pre-tax to the Roth IRA that is at the lowest taxable event that you can, i.e. 0-10% bracket; and your tax consequences are MUCH lower than if you had performed the ROTH contribution today, as opposed to this conversion. Such as – I would be paying 25%+ taxes on that post-tax contribution to the Roth if I contributed today.

      Does that make sense? Let me know and I can dive further!


  6. Great job! Came in at 9.32% myself. The other big item (for DGI folks) is the noise surrounding the ability to credit/offset foreign tax paid on dividends. Gotta love tax reform 🙁

    • Charlie –

      WHOA!!! Below the double digits, you son of a gun! That’s awesome and congratulations, great to hear and see. And yes… the noise on tax reform is quite interesting right now. What’s hard is that you know the initial plan won’t be passed, but what middle ground will occur?


  7. Very nice. Unfortunately here in Australia our taxes are very high. I do not make a huge amount of money but because my student loans are held with the government and our “free” healthcare my effective tax rate is closer to 30% which chews up a lot of capital unfortunately.

  8. One thing you need to be thinking of, IMHO – Required Minimum Distributions from pre tax retirement accounts. Given the young age you have started, you are going to have a pile of assets that would make Scrooge McDuck drool. No minimum required distributions from Roths, plus all money coming out is tax free ( at least under current tax laws – hope that stays ). Dream a little, if you have a few of million in retirement accounts in the way distant future, who would you want making the decision about the timing of, and the amount to be taken out? You, or the IRS? And how much tax would you want to pay on it then? Zero, or some unknown ungodly rate? Granted I am quite a bit older than you, but I see paying a little more tax now, in order to have greater freedom and control of my money is worth it.
    Another thing I like about using a Roth, having a cluster of dividend growth stocks in there will be giving me a growing tax free income. I find that to be exciting beyond words!!

    • Boyd –

      Thanks and love the comment. Agree that the forced withdrawals would be a pain! An article that I haven’t dove fully into writing yet is – converting my pre-tax dollars into Roth accounts, actually, and to do this when I am in a lower tax bracket to pay little taxes when I do convert vs. the higher tax that I would have paid today. Does that make sense? I plan on retiring early & to set things up financially to be in a very low tax bracket, and the conversion of these dollars will be at the lower tax bracket. So in effect, I do plan on experiencing the full benefits of the Roth features. I do also have a Roth, as I have contributed to one for years and years and only recently invested into a traditionally – and I could not even do the full amount in there – so will always be investing portions at least into the Roth : )


  9. Wow, just wow, not even 10.5%….. We probably paid about 3 times that with no chance of getting (much) back. I know we have a very good social system, but I’m kind of jealous when I look at the US and the options to become FI. From a tax perspective, life is so much easier on the other side of the pond. sigh….

    • CF –

      You are right, though, the social benefits that you have are far superior than the prices we have to pay for those here – where – it may end up being more cost effective from where you are : ) Just trying to make the most of the situation and plan accordingly, right? Sometimes… that’s what we can do, eh?


  10. Very good job. But not everybody can do it.

    I doubt I will start my own business, but I know I will be in a higher tax bracket than I am now. I will certainly be making more, so will my wife. That is 100% true, so I want that Roth. Taxes will also be higher. I know Trump is trying to lower them, but the government will have to raise taxes to pay the debt eventually. There’s no way around it.

    I can’t do the HSA because I don’t have an UHD plan.

    Traditional IRA: Don’t have one
    Rollover Traditional: Form an old employer, DGI strategy
    Roth IRA: Max out every year, my primary investing vehicle along with the Rollover
    Like I said, the chances that my income will be higher in retirement than now (with dividends especially) is very good. And when I did the math… say I am in a 28% tax bracket, effective tax = 21%. So, on $5,500 I will pay $1,155 in tax today. That will be $30,000 in 30 years at a 7% compound return. Even at 10%, I will pay $3,000 in taxes.

    I chose the Roth 401(k) option for the same reason as above. I can take the money out any time, don’t have to worry about taxes. I don’t have to worry about RMDs. And maybe I need long term care: I cant pay for it out of the Roth, but on a traditional I would be hit with taxes.
    My employer, however, matches with a pre-tax amount.
    I plan to spend the Roth first, then deal with RMDs in my 90s.

  11. My head hurts just thinking about taxes. Right now I max out my Roth 401k at work and my Roth IRA. I still don’t know if I made the right decision by going Roth. I don’t believe I’ll be able to retire early Lanny so I don’t know if going traditional is right for me. I have about 22 years before I retire, but we will see.

    • DP –

      It is very stressful and… nauseating at times, no doubt. If you have your destination more determined than not – then you should be fine! Hey – you’re investing and that’s the MOST important thing here! Just remember that : )


  12. This is something we can only be jealous of… Way to go, and interesting to see how big the effect can be while making use of this. Definitely know more about the US tax system because of reading your stories here 😉

    Although we pay a higher rate, we do get a lot of money back due to study costs we can retrieve trough taxes.

    • Divnomics –

      Always love to hear non-US residents’ perspective on the system we have. You do have a few other pros to your system, never a bad thing, but also a few drawbacks from a higher tax rate. I always believe that it’s all relative, right?


  13. I have a different view on the tax situation then you, and maybe different than most. But it doesn’t mean that yours isn’t a great strategy, it certainly is. I contribute only up to the match in my 401k and focus on my Roth IRA and Brokerage Account.

    I’m losing the front end tax savings, of course, but I want a portfolio that can support me earlier than my 401k will allow me. I view the 401k I’ll accumulate as a “bonus” come the time. Barring some large changes to the way dividends are taxed in the future (which is extremely possible given how far away it is) my tax rate in my early retirement will sit at 15%, I’m good with that rate.

    It’s fun seeing other strategies! Which is why the dividend investing community is such a great platform for learning.

  14. LOL!! You’re very funny! It cracked me up reading this post.
    Joke aside, 10% tax rate is better than people with make $35-80K without any property or any dividend income.

    2016 taxes kicked my butt, as I took a HUGE capital gain so I raise money to buy the new property. My tax bill is $6K. If Mr. and I were single, we both could have gotten money back.
    Either way, I kinda knew I had to pay taxes, so I wait until the day of to file taxes. But 2017, I think I’ll get money back, given that I don’t incur any capital gain or one day I’d go crazy and make some sell just because … heheheh LOL 🙂

  15. Boom! That is how it’s done! Understanding taxes and tax implications is what separates the good from the great. Just having at least a little knowledge of the subject can help to increase your net worth and free capital for investing a ton. Keep following your strategy and watch the benefits grow as fast as your portfolio.

    • Daze –

      Love the enthusiasm and motivation to keep going. 4 months in the books with my strategy this year as well, no looking back now and the net worth is exponentially growing, but more specifically – forward income : )


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