Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Should I invest in a Trad IRA if it is not deductible?
Old 03-07-2007, 01:19 AM   #1
Recycles dryer sheets
 
Join Date: Jul 2005
Posts: 423
Should I invest in a Trad IRA if it is not deductible?

I am unable to invest in a ROTH due to my AGI being over the upper limit. I am also above the limit to deduct any portion of a traditional IRA, but can still put in the max of $4k each for my wife and I. (8k total)

Should I do this?

I assume there is a benefit to the tax-free growth above and beyond the initial deduction?

I already max out my 401k, but my wife has no retirement plan currently.

Thanks!

__________________

__________________
Olav23 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Should I invest in a Trad IRA if it is not deductible?
Old 03-07-2007, 02:49 AM   #2
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 1,012
Re: Should I invest in a Trad IRA if it is not deductible?

Yes, and then in the future you can even convert it to a Roth. When you convert you will pay taxes on the gain but not on the contributions that you previously paid taxes on.
__________________

__________________
jdw_fire is offline   Reply With Quote
Re: Should I invest in a Trad IRA if it is not deductible?
Old 03-07-2007, 07:51 AM   #3
Full time employment: Posting here.
 
Join Date: Oct 2003
Posts: 961
Re: Should I invest in a Trad IRA if it is not deductible?

IMO, it depends for what you're going to use the non-deductible IRA. If bonds/REITs or some other really tax inefficient investment, then probably better than a taxable account. But if for tax efficient assets like equities [which also have favorable cap gains tax treatment], I'd forgoe the non-deductible IRA.

- Alec
__________________
ats5g is offline   Reply With Quote
Re: Should I invest in a Trad IRA if it is not deductible?
Old 03-07-2007, 11:07 PM   #4
Recycles dryer sheets
 
Join Date: Jul 2005
Posts: 423
Re: Should I invest in a Trad IRA if it is not deductible?

Well, as much as possible should go into a tax advantaged account right, even if it is efficient like an index fund? Or no?

I sometimes worry that I am putting TOO MUCH away into things I can't touch for many years. I am 30 years old an always max out my retirement savings with 401k and IRAs. I plan to have a child in the next year or 2, and will probably buy a house within 2 years or so.

I'm actually getting worried that I might not have enough in actual cash, but when I turn 65, I'll be a gazillionaire. Do any of you guys worry about things like this?

Knowing my luck, I'll have 10 billion dollars, live like a pauper, and die at 64 and 11 months

I guess if worse comes to worse, I could tap the IRAs with the penalty, but I would never use that as a front line defense by any means!

__________________
Olav23 is offline   Reply With Quote
Re: Should I invest in a Trad IRA if it is not deductible?
Old 03-07-2007, 11:48 PM   #5
Thinks s/he gets paid by the post
retire@40's Avatar
 
Join Date: Feb 2004
Posts: 2,670
Re: Should I invest in a Trad IRA if it is not deductible?

Quote:
Originally Posted by Olav23
Knowing my luck, I'll have 10 billion dollars, live like a pauper, and die at 64 and 11 months
pssssst....that's why we are all here. To figure out how to retire early so that doesn't happen.
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
retire@40 is offline   Reply With Quote
Re: Should I invest in a Trad IRA if it is not deductible?
Old 03-08-2007, 12:30 AM   #6
Recycles dryer sheets
 
Join Date: Jul 2005
Posts: 423
Re: Should I invest in a Trad IRA if it is not deductible?

Quote:
Originally Posted by retire@40
pssssst....that's why we are all here. To figure out how to retire early so that doesn't happen.
Touche, sir!
__________________
Olav23 is offline   Reply With Quote
Re: Should I invest in a Trad IRA if it is not deductible?
Old 03-08-2007, 08:22 AM   #7
Full time employment: Posting here.
 
Join Date: Oct 2003
Posts: 961
Re: Should I invest in a Trad IRA if it is not deductible?

Quote:
Well, as much as possible should go into a tax advantaged account right, even if it is efficient like an index fund? Or no?
In a non-deductible IRA, you get no upfront tax deduction, and all the gains are taxed like ordinary income when withdrawn. LT Capital gains and dividend tax rates are lower [sometimes much lower] than income from your job, bond dividends, etc. If you're going to be investing this money in equities, they can be held very tax efficiently in taxable account, like one of Vanguard's Tax Managed funds. While this won't defer taxation on the qualified dividends [and not allow the return from dividends to compound prior to taxation], it will defer almost all the capital gains [which will allow the return from cap gains to compound prior to taxation].

If you need/want to save for a house, you'd probaby want to be doing this in a taxable acccount, not a retirement account with withdrawal restrictions/penalties. IIRC, however, the contributions you put into a Roth IRA can be withdrawn at any time, just not the earnings. [might want to check on that though].

You may also want to beef up your emergency funds in a taxable account for the crap your wife wants to buy for the kid unforseen kid expenses.

- Alec
__________________
ats5g is offline   Reply With Quote
Re: Should I invest in a Trad IRA if it is not deductible?
Old 03-08-2007, 08:48 AM   #8
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Re: Should I invest in a Trad IRA if it is not deductible?

Quote:
Originally Posted by Olav23
Well, as much as possible should go into a tax advantaged account right, even if it is efficient like an index fund? Or no?
I think spouse and I only had a couple years of deductible IRA contributions before we lost the deduction (in the 1980s before Roth IRAs). We continued to make non-deductible contributions for over a decade. Now we're converting the conventional IRAs to Roths for a lifetime of tax-free compounding, which we wouldn't have been able to do if we hadn't made those original non-deductible contributions.

When you ER, especially before pension & SS benefits come rolling in, for a few years you may be in the lowest income-tax brackets of your life. If that bracket is lower than the tax bracket you'll be in later, then that's the time to convert. You only have that option if you have the conventional IRA to begin with.

Quote:
Originally Posted by Olav23
I sometimes worry that I am putting TOO MUCH away into things I can't touch for many years. I am 30 years old an always max out my retirement savings with 401k and IRAs. I plan to have a child in the next year or 2, and will probably buy a house within 2 years or so.
I think the Roth IRA gives you more early-distribution options... and certainly less paperwork (no 72(t) required). One of the early-distribution exceptions with a Roth is for the purchase of a house.

You may want to focus more on making sure that you have your down payment in the right asset class-- a money market or a CD, not a hot growth-stock fund.

Quote:
Originally Posted by Olav23
I'm actually getting worried that I might not have enough in actual cash, but when I turn 65, I'll be a gazillionaire. Do any of you guys worry about things like this?
All the time. In fact our worst fears may come true in the next 20 years and we'll end up with more money than we can possibly spend.

So we'll have to start giving it away. And I'm sure many on this board will be happy to help!

I think the bigger problem is the people who don't have enough actual cash because they're too busy spending it now. It looks like you're avoiding that problem...
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: Should I invest in a Trad IRA if it is not deductible?
Old 03-08-2007, 10:59 AM   #9
Full time employment: Posting here.
kaudrey's Avatar
 
Join Date: Feb 2006
Location: Alexandria, Va
Posts: 941
Re: Should I invest in a Trad IRA if it is not deductible?

Well, as much as possible should go into a tax advantaged account right, even if it is efficient like an index fund? Or no?

-----

As you can see, it depends. I make too much to convert an IRA into a Roth, so I opted not to do this. I put money in a taxable account instead (and do try to go for tax-efficient investments in it). It's true that right now the tax laws say anyone can convert in 2010, regardless of income, but I don't necessarily believe the law won't change before then.

__________________
Two roads diverged in a wood, and I - I took the one less travelled by...
kaudrey is online now   Reply With Quote
Re: Should I invest in a Trad IRA if it is not deductible?
Old 03-08-2007, 02:51 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Apr 2006
Posts: 1,487
Re: Should I invest in a Trad IRA if it is not deductible?

things might have changed, but more than several years ago it appeared that having both pre and post tax traditional IRAs could create a future bookkeeping nightmare.
__________________
d is offline   Reply With Quote
Re: Should I invest in a Trad IRA if it is not deductible?
Old 03-08-2007, 11:03 PM   #11
Full time employment: Posting here.
 
Join Date: Jan 2006
Posts: 899
Re: Should I invest in a Trad IRA if it is not deductible?

Olav,

You might want to take YOUR UNIQUE situation into account.

If you have very little money in after tax accounts then you might want to forget about the IRA contribution for this year and fund after tax investments. As you mentioned you might want to use it in the future and index funds at Vanguard are pretty tax efficient.

I suspect that we really don't have the information (e.g. future earnings and future tax rates, etc.) to determine the optimum decision.

I have max'ed out a 401k and a non-deductible IRA for the past 15 years but I also invest approximately an equal amount after taxes.

MB
__________________

__________________
mb is offline   Reply With Quote
Reply

Tags
ira


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
IRA not deductible - convert to Roth someday? spncity FIRE and Money 6 02-20-2007 12:43 PM
Help! SEP IRA was transferred into a Traditional IRA...bad? soupcxan FIRE and Money 5 12-19-2006 12:19 PM
Are IRA investment expenses deductible? DFW_M5 FIRE and Money 3 11-29-2004 05:05 AM
Where to Invest a Roth IRA chickbull Other topics 1 09-08-2004 12:52 PM
IRA Question vallieone FIRE and Money 9 11-19-2003 10:43 AM

 

 
All times are GMT -6. The time now is 09:33 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.