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Old 04-08-2014, 03:30 PM   #41
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Thanks for all the comments. I think I will avoid the non deductible ira for now.
This seems like a rather surprising conclusion since nothing that has been said contradicts the fact that using the non-deductible IRA for ordinary income investments and deferring tax from high to lower rates is not a bad idea if you have no more space to put the ordinary income investment in other more tax-favored vehicles. Different story for efficient capital growth vehicles but that's not was spec'd in OP.
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Old 04-08-2014, 03:47 PM   #42
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Many who earn too much to qualify for a deductible tIRA or Roth will not be in a lower tax bracket after retirement, especially if they reuse dryer sheets and save the high % of income that many here do.
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Old 04-08-2014, 03:52 PM   #43
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If you're holding one of those Penn Fed 3% CD's in your taxable account, how do you pay less than "ordinary rates" on the interest?
I don't hold any fixed income in my taxable account. All fixed income (including the Pedfed CD) is in tax-deferred accounts where it is deferred ordinary income.

My taxable account is domestic equities that generate tax free qualified dividends and some international equities that generate dividends that are partially qualified and also provide me with a credit for foreign taxes paid and both provide me with tax free capital gains.

My effective federal tax rate on my taxable account investment income and capital gains last year was 2.2% (taxes/income with/without taxable account dividends and capital gains).
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Old 04-08-2014, 04:58 PM   #44
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If you had invested the same way in a taxable account instead of the non-deductible IRA, then the small cap stock would still be now like 6x the cost basis. But what is going to be the difference in taxes when you need to spend the money?
Not really, because the fund does pay out income and capital gains distributions most years, so I don't think it would be 6X. Something smaller because of tax drain.
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Old 04-08-2014, 05:00 PM   #45
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Many who earn too much to qualify for a deductible tIRA or Roth will not be in a lower tax bracket after retirement, especially if they reuse dryer sheets and save the high % of income that many here do.
Not true in my case at all. Income characteristics can change drastically when it comes from investments instead of salary and so tax brackets can drop big time.
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Old 04-08-2014, 05:25 PM   #46
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Not true in my case at all. Income characteristics can change drastically when it comes from investments instead of salary and so tax brackets can drop big time.
+1

Especially with two incomes for a married couple. Our marginal tax band dropped significantly when we retired. I then did ROTH conversions on our non-deductible IRA's, and was taxed only on the gains. The following year I rolled over our before tax 401k's to Rollover IRA's
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Old 04-08-2014, 05:31 PM   #47
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Not really, because the fund does pay out income and capital gains distributions most years, so I don't think it would be 6X. Something smaller because of tax drain.
Ah, I see. I guess it was a tax-efficient fund then.
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Old 04-08-2014, 05:41 PM   #48
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Ah, I see. I guess it was a tax-efficient fund then.
I guess not super tax efficient as it did pay out distributions most years, sometimes substantial. But not as tax inefficient as an income fund or bonds.
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Old 04-08-2014, 05:47 PM   #49
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Many who earn too much to qualify for a deductible tIRA or Roth will not be in a lower tax bracket after retirement, especially if they reuse dryer sheets and save the high % of income that many here do.
OP hints , though admittedly does not say explicitly, that bracket will be lower later: (from OP) "Instead, I was wondering whether there might be some advantage to save highly taxable funds, like bond funds or reit funds in a non-deductible IRA to avoid getting 1099's from these investments during my high tax-bracket years (now)."
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Old 04-08-2014, 06:21 PM   #50
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I don't hold any fixed income in my taxable account. All fixed income (including the Pedfed CD) is in tax-deferred accounts where it is deferred ordinary income.

My taxable account is domestic equities that generate tax free qualified dividends and some international equities that generate dividends that are partially qualified and also provide me with a credit for foreign taxes paid and both provide me with tax free capital gains.

My effective federal tax rate on my taxable account investment income and capital gains last year was 2.2% (taxes/income with/without taxable account dividends and capital gains).

During your earning years, was your income low enough that you qualified to contribute to deductible IRAs or Roth IRAs? Are those what make up your deferred accounts?
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Old 04-08-2014, 06:27 PM   #51
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A (sort of) thought experiment regarding taxable versus tax-deferred IRAs.

Back in the early to mid 1990s we purchased granted incentive stock options. Most of us purchased with after tax funds, so these became part of our retirement portfolio.

But one older colleague somehow swung it to purchase his stock options through an IRA. He must have had a rollover IRA from a previous job in a brokerage account, but I think it still took considerable finagling to pull that off.

We paid no taxes as our company stock appreciated considerably because it was all unrealized gain. It ultimately grew enough to retire early.

Later, as we got ready to retire we finally started to diversify that stock. We paid a straight 20% at first, then later 15%, and still hold some of the original investment. We are in the 15% tax bracket, pay 0% on some of our cap gains/qualified dividends, we get hit with a little AMT at times due to a high amount of cap gain/qualified dividend income but still our effective tax rate stays well below 15% overall.

But my colleague who retired before I did, must have had to set up a 72T once he needed to draw on those funds. And then he would have been paying ordinary income rates on his withdrawals. One day he'll have to take RMDs.

I sometimes wonder whether he was glad he finagled to purchase in his IRA, or wished he hadn't. I know that later I was just fine with things being taxable, but initially I assumed he was making a very smart move.

I simply don't know enough about his case to really know.
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Old 04-08-2014, 07:30 PM   #52
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During your earning years, was your income low enough that you qualified to contribute to deductible IRAs or Roth IRAs? Are those what make up your deferred accounts?
Some deductible IRAs early in my career, but most my tax-deferred is from 401ks over the course of my career during my higher earning (and higher taxed) years.

Roths came into play later on once I went part time and are only 8% of the total.
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Old 04-09-2014, 09:15 AM   #53
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I simply don't know enough about his case to really know.
That seems to be the bottom line. Based on comments in the thread, it seems individual circumstances dictate whether a non-deductible IRA works out favorably or not. I funded non-deductible IRA's for a number of years many years ago. I invested in interest bearing instruments which seemed like a good buy at the time and just let things compound, tax shrinkage free, over the years. Now FIRE'd and in a lower tax bracket, I'm doing some Roth conversions and anything not converted will be part of upcoming RMD's, along with my 401k.

It is possible that I could have invested this money in a taxable account, picked the right investments and actively managed for tax efficiency and done better. But I wanted a small percentage of my portfolio sitting in conservative, interest bearing instruments that required little intervention and had zero impact on my taxes. In retrospect, the non-deductible IRA strategy seems to have worked out well in my circumstances.

Today I fund a non-deductible IRA for my son. I wanted to have a place to do some recreational short term trading and for trying some new investment strategies I've been trying to learn. He opened the account, got me POA and the password and I fund and trade it. There is no impact on his taxes, no paperwork for him to worry about other than including an 8606 with his taxes every year, a five minute (at most) job. So far, it's been great fun, I've enjoyed having a few bux involved in short term trading and I've learned some new things.

OTOH, some of the other posters have shared taxable account strategies that are working out well for them in their individual and different strategies.

So maybe the answer is "it depends."
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Old 04-10-2014, 03:23 AM   #54
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a non deductable ira would be very similiar to using an annuity in a taxable account.

the lower capital gains rates from just buying equities in your taxable account will beat the tax deferred growth and paying regular tax rates generally.

the newsletter i subscribe to just did a comparison of their growth model which uses fidelity funds vs their annuity model utilizing the same or closest funds .

100k invested 20 years ago worked out to be about 50k more utilizing writeoffs and lower capital gains rates in the taxable account than the deferred annuity taxed at regular rates assuming a 25% tax bracket, the after tax balances were 367k for the growth model vs 309k for the tax derred annuity model. ...the fidelity annuity products do carry a slightly higher expense fee so some oif the difference is a bit of expense difference too.
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Old 04-10-2014, 02:36 PM   #55
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a non deductable ira would be very similiar to using an annuity in a taxable account.

.
Actually, that's not true. Annuities do not allow you to trade individual positions and have higher fees.
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Old 04-10-2014, 02:58 PM   #56
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Actually, that's not true. Annuities do not allow you to trade individual positions and have higher fees.
you certainly can trade positions , fidelity has a whole selection of vip funds.

you can change any time you want.

I already mentioned the higher fees although they are not to bad in fidelity.
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Old 04-10-2014, 03:09 PM   #57
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Actually, that's not true. Annuities do not allow you to trade individual positions and have higher fees.
I believe the post was referring to the tax treatment only. Which is then true you get some of the annunity as return of capital which is not taxed and some as income which is taxed. Now the issue of what you invest in and fees are different issues.
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Old 04-10-2014, 04:15 PM   #58
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I believe the post was referring to the tax treatment only. Which is then true you get some of the annunity as return of capital which is not taxed and some as income which is taxed. Now the issue of what you invest in and fees are different issues.
What we are investing in is the key thing for us. We are using the non-deductible IRA for short term recreational trading and it has advantages over a taxable account for that purpose. And an annuity would not allow the trading at all.
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Old 04-10-2014, 04:19 PM   #59
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you certainly can trade positions , fidelity has a whole selection of vip funds.

you can change any time you want.

I already mentioned the higher fees although they are not to bad in fidelity.
Trade individual equities, not funds.

Sorry if I was not clear.
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