Retirement and Financial Independence

How to Reduce Taxable Income With Advanced IRA Strategies

Updated on October 20, 2019 Updated on October 20, 2019
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advanced IRA

Our guest, the Mad Fientist delves deep into advanced IRA strategies. Find out why you should have one and which one will best fit your needs.

Brandon shares the same goal as many of us, to retire at a young age and avoid paying as much tax as is legal! How you handle your IRA’s can be a big part of achieving both goals.

Traditional IRA

A Traditional IRA is not taxed upfront but at the point of withdrawal. The money grows tax-deferred. Upon withdrawal after age 59 1/2, the money is taxed as income. For 2016, you can contribute up to $5,500, $6,500 if you are aged 50 or older.

Roth IRA

A Roth IRA is taxed upfront and not upon withdrawal after age 59 1/2. For 2016, the contribution limits are the same as for a Traditional IRA.

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Many people have a 401k through their employer. A 401k is similar to a Traditional IRA. The money goes in tax-free. When you leave your job, whether it’s to take a new one or to retire, roll that account into a Traditional IRA. This simplifies things so you aren’t trying to keep track of several accounts, and it gives you more control over fees.

FeeX: Destroy Hidden Fees with Uri Levine

FeeX: Destroy Hidden Fees with Uri Levine

You may not even know how much you’re paying in fees for your 401k, and if you take the time to find out by reading the prospectus, there isn’t much you can do about it anyway because your options are selected by your employer. And investment account fees can cost you a lot of money. Americans pay over $6 billion dollars in investment fees per year.

Vanguard makes rolling over your 401k easy, and they have very low fees.

Why Traditional Over Roth?

When you’re in the prime of your career, you’re being taxed at a higher than you are likely to be in the future. You want the tax advantage of the Traditional IRA during your highest-earning years because once you give up those tax advantages, they’re gone forever.

Will tax rates be raised in the coming years? Yes, probably. But new loopholes will be added too and as long as there are people like Brandon around, we will know ways to take advantage of them. Is it a risk? It is, but it’s a calculated one.

Roth IRA Conversion Ladder

Both types of IRA’s are used at different stages of life to reap the most tax benefits possible. Brandon has a method for this, the Roth IRA Conversion Ladder. You contribute to a Traditional IRA during your working life because it’s likely that your tax rate is higher now than it will be after retirement.

After you leave your job, you will have less taxable income. During this time, you slowly roll the Traditional IRA to a Roth. This rollover counts as ordinary income so to do this tax-free, convert a dollar amount equal to your tax deductions and exemptions.

During this time, you live off your capital gains and dividends because they are taxed at 0% so long as you’re in the 10 or 15% tax bracket. For 2016, anyone making less than $9,225 is in the 10% bracket, and anyone making between $9,226-$37,450 is in the 15% bracket.


As we learned in our Natali Morris episode, it’s the people who earn salaries from an employer who take the hardest tax hit. The reason a bunch of LMM listeners are rushing out to start LLC’s! Unsurprisingly, Brandon has a way to super hack your LLC to mine even more tax benefits.

We did a little calculating during the episode, and if you paid yourself $80,000 a year via dividends from your LLC, you would only be liable for $5,000 in taxes! If you were making $80,000 from a salaried job, you would pay over $19,000 in taxes!

What To do With $3,000

We asked Brandon what he recommends if you have $3,000 to invest. He suggests putting all of it into a 401k if you have matching. Always take matching because it’s free money. If you don’t have matching, put it into a Traditional IRA. If you can’t contribute to a Traditional because you’re over the allowed contribution limit for the year, then it goes into a Roth.

The Roth IRA Horse Race

For our listeners with advanced personal finance knowledge, Brandon has a strategy he calls the Roth IRA horse race. It’s a way to supercharge your Roth conversion ladder by minimizing taxes.

When you roll a Traditional IRA to a Roth IRA, you can undo the conversion before filing your tax return. This is known as a Roth recharacterization. You could execute the conversion in January and then undo the conversion by April 15th of the following year (or October 15th, if you file an amended return) to the IRS, it’s like the roll over never happened.

This is high-level stuff, and it’s a lot of work. It can pay off, though.

What If You Need Your Money Sooner?

This is all great if you plan to retire late in life but what if you want to retire early?  You need money to live on, and you don’t want to pay early penatly withdrawals. If you are concerned about having a lot of money tied up and not easily accessible, a Roth IRA is a better choice. The principle can be withdrawn anytime without being taxed or penalized making it a good place to park your emergency fund too because it’s growing tax-free.

Index Funds

We are fans of set it and forget it, and Brandon is too. He uses Vanguard’s Total Stock Market Index for his Roth contributions because it covers a large swath of the market. We did a review of the best Vanguard funds – you should check it out!

If you pay a fund manager to invest your money because you think the best brains Wall Street has to offer can do a better job than an index fund, you’re wasting your money. Index funds outperform managed funds 90% of the time.

If you think you can spend enough time researching stocks to be in the 10% that’s beating the index, give us a call, and we’ll get you on as a guest ASAP. Really, though, you would be better off spending your time the way Brandon has and researching tax avoidance plans. Remember, tax fraud is illegal, tax avoidance is encouraged.

Fees are the biggest drag on investing.

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A SEP IRA is a simplified employee pension. It’s a retirement account for those who are self-employed. The employer is given a tax deduction for SEP contributions and can make contributions on behalf of eligible employees. You can have a SEP in addition to a Roth and Traditional IRA and the SEP has a much higher allowance for the contribution, up to $52,000 per year depending on income.

A SEP IRA is considered a Traditional IRA by the IRS so the same tax rules apply to a SEP as to a Traditional IRA.


If you’re in a high-deductible health insurance plan, you can use an HSA, or health savings account. It’s tax-free money set aside for health care expenses. It’s a bit like a Traditional IRA or 401K in that the money is not taxed going in. It grows tax-free while in the account, and when used for medical expenses, it’s not taxed going out either.  Completely tax free money! The contribution limits for 2016 are $3,3350 for an individual and $6,750 for a family.

Should you leave your job, get fired or laid off, you can take your HSA money with you and use it to pay Cobra premiums and once you reach 65, you can use it to pay Medicare premiums.

Even if you’re self-employed, you can set up an HSA for yourself. Just buy a plan that is HSA qualified and you can reap the rewards available to the rest of us, wage slaves. About 20% of the offerings on the health care exchange are HSA qualified so you’ll have several to choose from.

Now here’s the hack. Brandon had surgery that cost $2,500 out of pocket to meet the deductible. He paid that with his money, not the money in the HSA account. He kept the receipt (who knew a hospital provided a receipt!?).

When he wants to spend $2,500 on a vacation or a new television or whatever, he takes the money out of the HSA, spends that and then provides the receipt he was given for the surgery. Tax-free vacation or new television. Genius.

The Mad Fientist Lab

Perhaps unsurprisingly, Brandon is a developer like Andrew. They must just be wired differently to the rest of us. He wrote software that is available in the Mad Fientist Lab that allows you to input some numbers and chart your timeline for reaching financial independence.

The Biggest Expenses In Life…

Are taxes and interest. If we can minimize those two things, we will put much more money in our own pockets and add many more years to our retirements.

Show Notes

The Mad Fientist:  Brandon’s website and podcast.

Betterment:  Our favorite investing tool. Use this link and get six months with no fees!

LMM Community: Join the money revolution! Join the money revolutions!

Candice Elliott - Editor-in-Chief Candice Elliott is a substantial contributor to Listen Money Matters. She has been a personal finance writer since 2013 and has written extensively on student loan debt, investing, and credit. She has successfully navigated these areas in her own life and knows how to help others do the same. Candice has answered thousands of questions from the LMM community and spent countless hours doing research for hundreds of personal finance articles. She happily calls New Orleans, Louisiana home-the most fun city in the world.

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