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Non-Deductible IRA or Taxable?
Old 02-01-2009, 07:11 AM   #1
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Non-Deductible IRA or Taxable?

I contribute to a traditional 401(k) with matching at work. I am not eligible for a Roth IRA. I have been contributing the max to a traditional IRA for quite a few years, with no tax deduction, and I am starting to wonder if it's likely to my advantage. I've always "reasoned" that if tax rates, capital gains, etc. all stay the same and my retirement income/withdrawals put me in a lower tax bracket, I should come out money ahead in the traditional IRA. But my time horizon is up to 16 years (70) and I don't see how tax rates and/or capital gains won't increase substantially (I once assumed they wouldn't change appreciably). Just asking for a second opinion on non-deductible IRA's vs leaving the money in taxable?

If it matters, my holdings are all low-expense (index) mutual funds, almost no trading - rebalance with new money, and I have access to the universe of options either way. And I'm about 2/3 taxable, 1/3 sheltered already if it matters.
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Old 02-01-2009, 07:55 AM   #2
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I'm almost all taxable, 401k is not offered to folks in my income range at work. I have a deferred comp plan to get the match. All other retirement related investments go into the taxable...but I'm mostly adding to the munis to bring my AA into line for FIRE in a couple years...they aren't taxable anyway, and I've been buying in at 6% +/- yields. Frankly, the munis are worrying me just a little, as I don't know what happens when a state or municipality goes bust, but I have a hard time believing that I would not recover those investments (how would a bankrupt city or state be able to reneg on debt to its own taxpayers?...). FWIW

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Old 02-01-2009, 08:14 AM   #3
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I've always seen that long-term cap gains tax rates have been lower than ordinary income tax rates, so I would vote for taxable account and not the non-deductible traditional IRA.

Some folks do the non-deductible tIRA so that they can convert to a Roth in 2010. The idea is that the conversion will cost them almost no taxes because only the gains (what are those? ) will get taxed at their high marginal income tax rate.

That written, I have an old non-deductible tIRA from when I thought I could do short-term trading essentially tax-free. I gave up on trading and just made that IRA 100% fixed income (TIPS and GNMA). Nevertheless, that prevents me from doing the 2010 conversion thing.

So I max out my 401(k) contributions, my spouse maxes her 401(k) contributions, some goes to 529 plans and the rest goes to a taxable account. With the taxable account, at least I can do tax loss harvesting. Those will keep my taxable gains tax-free for many centuries to come.
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Old 02-01-2009, 08:44 AM   #4
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Quote:
Originally Posted by LOL! View Post
That written, I have an old non-deductible tIRA from when I thought I could do short-term trading essentially tax-free. I gave up on trading and just made that IRA 100% fixed income (TIPS and GNMA). Nevertheless, that prevents me from doing the 2010 conversion thing.
:
Having trouble understanding why you can't do the 2010 conversion. Could you explain?
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Old 02-01-2009, 06:13 PM   #5
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Having trouble understanding why you can't do the 2010 conversion. Could you explain?
I have a tIRA that was started in the 1984 and is now not small with significant gains, so if I did a conversion, I would have to split (or pro-rate) any converted amount between my 1984 tIRA and my 1990's non-deductible tIRA (they are really a single account nowadays). I would pay 30% tax on the large fraction that would not come from the non-deductible parts if I converted in 2010. If I wait a few years, I think the tax rate for me will be about 0% on a conversion, but certainly well under 30%.

The idea of conversion in 2010 was for folks new to the non-deductible IRA game: Put $4000 in a non-deductible tIRA in 2009. Have no gains and no other tIRAS, then convert without paying any extra taxes.
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Old 02-02-2009, 04:37 PM   #6
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Why not do both?
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Old 02-02-2009, 10:06 PM   #7
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I have a spreadsheet that lets you put in different tax rate assumptions and see which one comes out ahead and by how much. If you Google "non-deductible IRA" you will see it.
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