Optimal Salary for Government Handouts

[TripleB]

I've been contemplating semi-early retirement for quite some time. I've decided that I want to retire such that I don't "need" to work to cover my expenses, but still maintain a very light employment of perhaps 10 hours per week, simply to stay in the workforce, maintain skills that I enjoy using, and most importantly, maximize my personal financial utility.

There are 3 government handouts that I'd like to maximize during semi-retirement:

1) Earned Income Credit
2) Retirement Savers Credit
3) Social Security Credits

The optimal point for a single person with no children is to earn between $6k and $8k per year gross and contributing $5k to a Roth IRA. In doing so, one:

a) receives the maximum EIC of $464 for 2011 (and will adjust for inflation)
b) receives a refundable $1k tax credit
c) maxes out social security credits for the year
d) pays $0 in federal income taxes

Suppose you earn $6k gross. You will pay ~$500 in SS/Medicaid taxes. Thus you net $5,500. However, after receiving the savers credit and EIC, you will get an additional ~$1,500 for a total of $7,000.

You get to shelter nearly all of that $7k from future taxes because you're allowed $5k in a Roth IRA. Technically, you only need to put $2k into the Roth IRA to receive the $1k savers credit, however if you don't need the money, you'd be foolish not to max out the Roth IRA.

The biggest caveat to this plan is one needs to have investment income that is less than ~$3k or you do not qualify for EIC. Also, you can't be doing SEPP, which is what a lot of early-retirement plans may call for, or you will negate your savers credit.

The question then becomes, how do you live, without earning investment income of >$3k if you're only bringing in $2k after Roth IRA contribution?

The answer is that you must tap principal during this time frame. I can foresee this working in a few ways:

1) Reverse mortgage/HELOC. You've paid down your home in full during your full-time work years. Then you early-retire and work to earn $6k per year. You pull a reverse mortgage to pay for food/gas/medical insurance/property taxes, etc. The bulk of your investments are in tax-sheltered accounts and in taxable accounts you have stocks that are spitting off dividends <$3k per year, and gold coins that spit off nothing. Thus keeping your investment income <$3k but having enough to live off. You milk the system for about 10 to 20 years, earning $6k per year at a very part-time job. Then, when it's time to pay the HELOC back because you stripped as much equity out as you can, you run SEPP, or principal contribution withdrawal from the Roth, or if you're older than 59.5 at this point, just regular IRA withdrawals.

2) You have large sums of cash sitting in taxable that are earning under $3k per year in interest. You withdraw from the principal in order to pay living expenses.

3) Any other way to get living expenses that doesn't raise your AGI above $8k and doesn't raise investment income above $3k.

OTHER POSSIBILITIES:

The savers credit is worth $1k and the EIC is only worth just under $500. The savers credit will work up to $17k AGI, however you need at least $2k in earned income because you can only contribute earned income to a retirement account. Put putting $2k into an IRA while AGI <=$17k, you get $1k free money from government. Thus, you may get a part-time job that pays $2k per year (maybe working 100 hours for $20 an hour), and you convert $15k of Traditional IRA/401k Money that you earned at your full-time job prior to semi-retiring, into a Roth IRA. This pushes your AGI up to $17k so you qualify for the 50% savers credit ratio. Your taxable income will be virtually nothing due to standard deduction/personal exemption. You never paid income taxes on the T-IRA/401k money going into the account, and you will never pay taxes on it coming out of the Roth IRA, and if you can avoid paying taxes on the conversion, then it was earned tax-free and all interest earned will be tax-free forever. That's like a quadruple win.

Realistically, since standard deduction/personal exemption is about $10k, you can likely only convert $8k of T-IRA/401k money each year, plus $2k of earned income which will go to a Roth IRA, and still maintain $0 federal tax burden for the year. I mention the ability to convert up to $15k and still remain under the $17k AGI threshold for savers credit, in case you wish to pay 10% tax on the amount above $7k, or if you have itemized deductions from property taxes/mortgage interest that would raise your ability to convert tax-free.

The purpose of this discussion is purely to maximize utility from a government handout perspective, LEGALLY. I'm not suggesting you are maximizing utility from any other aspect by this. It might be that your optimal number of hours at the part-time job will put your income at $3k per year...or $10k... or something other than what I described above. Then you have to decide whether you get more overall utility from doing that and forgoing some government handout money.

Personally, I gain enjoyment from gaming systems and I would be more than happy to do seasonal work over Christmas holidays as a cashier for one month at minimum wage to earn $2k, knowing that I am getting every cent I can out of the system that I personally find to be very corrupt, while minimizing what I am paying into it and still enjoying my life.

[Ralphy]

This is a topic I play around with once in a while, but I first just want to point out that the Saver's Credit is nonrefundable.  You can use it to reduce federal income tax liability to 0, but not to get any extra money in your refund.  So in this hypothetical situation, if tax liability is already $0, then the credit is worth $0.

http://www.1040.com/federal-taxes/credi ... ngs-credit

[MachineGhost]

Personally, I gain enjoyment from gaming systems and I would be more than happy to do seasonal work over Christmas holidays as a cashier for one month at minimum wage to earn $2k, knowing that I am getting every cent I can out of the system that I personally find to be very corrupt, while minimizing what I am paying into it and still enjoying my life.

I think a better way to go is to use a Solo Roth 401(K) and control the hours you work as self-employed.  You'll still pay into SSA but you'll have a vastly higher contribution limit of 49K plus the 5.95K standard deduction and 3.8K personal exemption.

MG

[TripleB]

I made a mistake. Thank you for correcting it. The savers credit is nonrefundable. I thought it was a refundable credit like EIC. I'll have to revisit this plan in the near future.

Perhaps it would be optimal to skip EIC, and instead earn $2k to $17k per year, put $2k to $5k into a Roth, and pay $0 in income taxes due to savers credit.

The maximum benefit will likely occur from earning $5k in earned income (to max out SS credits), and then doing a Roth Conversion for $12k because my estimates show with a $1k savers credit and $10k standard deduction/exemption, you can have an AGI of $17k tax-free. That reduces the amount of FICA tax you pay while still keeping maximum benefit from the saver's credit.

[MediumTex]

Presumably you could also apply for Food Stamps at that income level, right?

Is there an asset or net worth test for Food Stamp eligibility?

Maybe you could set up a "Food Stamp Trust" to get your assets off your personal balance sheet for Food Stamp application purposes.

[TripleB]

Presumably you could also apply for Food Stamps at that income level, right?

Is there an asset or net worth test for Food Stamp eligibility?

Maybe you could set up a "Food Stamp Trust" to get your assets off your personal balance sheet for Food Stamp application purposes.

I looked into this when I was in graduate school. If I recall correctly, the food stamps are handled on a state-level, and at least when I researched it, retirement assets counted, so I wouldn't have been eligible.

My first thought to reading "Foot Stamp Trust" was a huge sarcastic eyeroll. Then I realized that people create Medicaid Trusts to cheat the government out of 100x more money than a Food Stamp trust would.

Just for shits and giggles, I will actually look into the legality of a Food Stamp trust, and if legal, do it just to show how flawed the system is.

[moda0306]

Food Stamp Trust.... Medicaid Trust??

What are these?  Ways of hiding wealth so you can apply for these programs?

I always wonder what a son/daughter of a very wealthy individual could get away with in social benefits simply as a result of not having much in actual wealth or income.

[TripleB]

Food Stamp Trust.... Medicaid Trust??

What are these?  Ways of hiding wealth so you can apply for these programs?

I always wonder what a son/daughter of a very wealthy individual could get away with in social benefits simply as a result of not having much in actual wealth or income.

A Medicaid trust is extremely common in the US, especially amongst the middle class. Old people put their assets (Cars, homes, cash) into a trust, so that they don't have assets, and can then qualify to live in a nursing home, that costs the government around $30k per year. Before Medicaid kicks in to pay for it, the person has to exhaust their personal assets, thus not letting them leave any to their children. So they set up trusts, the kids get the assets, and the government pays $30k/year nursing home costs until they die.

MT offered a semi-facetious alternative: a Food Stamp trust, that doesn't currently exist, because the reality is hiring an attorney would be more expensive than the actual free handout money. I'm guessing you're lucky to get $1500 per year in food stamps as a single adult male, even if you're dirty poor and living in the most generous of states. In most states, single adult males probably qualify for no food stamps even with zero assets. Most food stamp programs are based on number of children you have, which is why some people complain that poor women purposely have multiple babies because they are incentivized by higher handouts.