I have completed our 2015 tax return so, armed with the exact amount of tax we paid for 2015, I’m now ready to calculate our savings rate for the year.
Let me just start by saying we did a damn good job being tax efficient this year. Our effective income tax rate wasn’t even a mere 3% despite having a joint income of almost $150k (with employer retirement matching).
Here’s the breakdown on our taxes (most numbers rounded for security/anonymity):
Gross income: $140,800 + $8,600 employer matching
IRS income: $69,000
Adjustments: $11,000 (traditional IRA contributions)
Standard deduction and two personal exemptions: $20,600
Taxable income: $37,400
Tax owed: $4,600
Saver’s credit: $400
Total income tax: $4,200
Using the rounded numbers above we had a 2.8% effective tax rate for federal income tax. You might be asking yourself, “How in the unholy name of hell did they pull that off?!?” Don’t worry, dear reader, the details are below.
The first thing that should pop off the page is that our gross income was $149,400 but our “IRS income” was $69,000. The reason I have it labelled as IRS income is that retirement contributions that get deducted from your paycheck (like 401(k), 403(b), and 457(b) contributions) don’t count towards your income as far as the IRS is concerned.
Mrs. Dragon and I have a pretty sweet situation in that we each have access to both a 403(b) and a 457(b) account at work. For those of you who are unfamiliar, a 403(b) is almost exactly like a 401(k) account except that it’s for non-profits, rather than for-profit companies. So it’s a tax-deferred account, which means you don’t pay taxes on the money now, but you have to pay taxes on the money when you take it out.
And if you haven’t heard of a 457(b) account, they are mostly reserved for government employees. Since we work at a state-run university, that includes us!
The 457(b) account is similar to the 401(k) and 403(b) with a few big exceptions. In a 457(b) the money is tax-deferred, just like the 401(k) and 403(b). However, the big difference with the 457(b) is that, unlike 401(k) and 403(b) accounts, you can take the money out of the 457(b) penalty-free before retirement age. The only caveat is that you cannot take the money out as long as you still work for your employer.
So if you quit your job, or get fired, or retire early 😉 , then you can access the money penalty-free. You still have to pay taxes on the money, but you aren’t penalized for accessing the money before retirement.
For the future early retiree, the 457(b) account is thebomb.com (that’s still a thing, right?).
Back to the numbers, Mrs. Dragon and I both maxed out our 457(b) accounts to the tune of $18k each. We also both put money into our 403(b) accounts, but we didn’t get to max them out. We ended up putting in $15,700 and $11,500 in the two accounts.
As mentioned above, we also both maxed out traditional IRA accounts (which were fully deductible thanks to our 457(b) and 403(b) contributions). That’s another $11,000, or $5,500 each.
Now, we also have a mandatory contribution to a separate retirement account because we opted out of the state pension plan. The contribution is right at 6.5% and is matched by our employer. For this year that ended up being about $4,300 each and another $4,300 each from the employer match.
Totaling some numbers up, we get $18k + $18k + $15.7k + $11.5k + $11k + $8.6k + $8.6k = $91,400 that got put into tax-deferred accounts last year.
Can I just say that is crazy. It’s easy to type these numbers on the screen, but it took a LOT of planning and tweaking and adjusting to make it happen. Including a couple of months at the end of the year with a combined net pay less than $30 because we didn’t plan as well as we could have. Our HR representative got to know us pretty well. 🙂
So, $149,400 – 91,400 = $58,000 as the number for our adjusted gross income (AGI).
It just so happens that the cut-off AGI for being able to take the saver’s credit is $60,000. Score! The saver’s credit is for people who contribute to retirement accounts, are not full-time students, are not dependents, and have an AGI of less than $60,000.
Since we’re in the upper income limit for the credit, that means that we were able to get a credit for 10% of up to $4,000, which accounts for the $400 credit at the top of this post. This credit combined with the standard deduction for “Married Filing Jointly” and two personal exemptions lowered our taxes down to the $4,200 listed above.
That’s the story of how we paid $4,200 in taxes on about $150,000 in income.
Now let’s talk about savings rate. In a nutshell your savings rate is how much of your income (as a percent) you save during a calendar year. There’s a lot of debate in the personal finance community about exactly how you should calculate your savings rate, but I like the following formula:
[(Gross income + Employer match – Taxes paid – Expenses) / (Gross income + Employer match – Taxes paid)] * 100
So here are the numbers I’ll be plugging in:
Gross income = $140,800
Employer match = $8,600
Taxes paid = $4,200
Expenses = $34,476
So, using the formula above we get [(145,200 – 34,476) / (145,200)] * 100 = 76.26%
Using the retirement calculator over at networthify.com, it tells us that if we keep that up we can retire in 6.8 years. Hell to the yes!
Gross income: $149,400
Income tax: $4,200
Savings rate: 76.25%
I would take those numbers all damn day. Unfortunately, I don’t think we’ll replicate those numbers this year. With the baby on the way, we won’t be taking on as many extra money-making opportunities. But any time you can put a year like this in the books, you should! Now this money can grow and compound every year, even if we don’t do quite as well in the future.