1st or 2nd Year analyst Tax Strategy??? Best way to minimize

I am hoping for advice on effective tax-reducing strategies, particularly the big chunk that comes out of bonuses. Sticking $15.5K in 401k seems like a good start bc that is tax free. Other good advice wanted.

 

Excellent topic.. would like to hear more suggestions/advice regarding this!

--------------------------------------------------------------------- "The future belongs to those who prepare for it today" - Malcolm X
 

Max out your Roth IRA before the new year your first year. Its the only year you will make less than the cutoff. It won't reduce your tax burden today, but diversifies your retirement tax situation.

For your first year, you won't make that much, and if you paid for school you can take a number of tax credits for doing so. Moving expenses, provided you are moving far enough, are tax deductible. In general, for your second taxable year (after you get your bonus), there's not much you can do aside from max out your 401k. You will be in a very high tax bracket, paying state and city taxes.

--There are stupid questions, so think first.
 
Best Response

I would avoid maxing out your 401K in your first tax year. You basically get every penny of tax back. You make 30K in your first year, factor in taxes, etc, it's the lowest tax year in your career.

Make full use of pre-tax items from your company. Transportation and health spending accounts are a great way to spend pre-tax dollars on stuff you would buy anyways.

In January of your first year, when your new tax year begins, is a good time to start pumping in your 401K. It depends on how much cash you have. If you're not coming into the job with tons of money from mom and dad, it may be better to get more cash now and pay less interest than to tax defer it. As a first year, you most likely don't have a home, and any line of credit will have a hefty cost (most likely a credit card). So, take cash now, you're cost of debt is high.

Take advanatage of student loans if you can. It depends on your situation. I had extra cash, and the rate I was earning on my savings account was roughly the same as the cost of debt on my student loan, so I decided to pay t off. However, if you don't have the cash, make minimum payments and then pay a large chunk once you get your bonus. Remember, interest on student loans is tax deductible. (and keeps your personal WACC low).

 

Do you recommend maxing out a Roth IRA? It seems 5K, the limit for 07' is worth more to a first year as cash or near cash, than locked away in a Roth. My thinking is that the money is more valuable now, when income is relatively low, versus what it can grow to 50 years down the line when hopefully you will have a lot larger income.

 

Actually I just did my taxes the other day and came to the conclusion there's not a whole lot you can do as an Analyst to minimize taxes... tax deductions are much easier if you own property, own a business, or have income from non-job sources.

In my first tax year (2006) I effectively paid almost no tax because of the half-year situation and because I deducted the max amount of student loan interest.

In 2007 that stopped working because I was in a high tax bracket and couldn't save on much besides the 401(k).

BTW, as eric809e mentioned, I would actually not necessarily recommend doing a 401(k) just to save on taxes... in general you should not make investment decisions for tax reasons, you should invest because of long-term savings goals and because you want to do well with the investments.

I was in a similar position with very little cash and having that extra cash vs. putting everything I could in a 401(k) was very helpful.

 

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