IRA's for income over $200K

[Foodeefish]

Where is the best place to purchase IRA's if your income is over $250K and how much can a married couple invest each year?
I know they are not deductable due to our income  but we have maxed out our 401K plans and many people on this forum say they are a good thing to do.

 

[Chris24]

I can only give you my experience. I started a BrownCo IRA a few years ago, but has now been bought out by E-Trade. Are you just going to using Mutual FUnds or tradng stocks and the like ? . If you are doing alot of trading, look for Low fees. (scottstrade maybe?). If you are just parking the money in MF's, set up your IRA with the fund family you like. Some discount brokers let you buy MF's through them, but can be limited on which ones. The adavantage of non deductible IRA is the tax free compounding, (hopefully), of your assests. THe 'tax efficiency' of a transaction is taken out of the equation.

Christopher

 

[SteveR]

Where is the best place to purchase IRA's if your income is over $250K and how much can a married couple invest each year?
I know they are not deductable due to our income  but we have maxed out our 401K plans and many people on this forum say they are a good thing to do.

It is a nice problem to have.

You can also look at Vanguard; lower rates than most and with your income and contributions you would qualify for better rates for high balance accounts.

 

[Martha]

Where is the best place to purchase IRA's if your income is over $250K and how much can a married couple invest each year?
I know they are not deductable due to our income but we have maxed out our 401K plans and many people on this forum say they are a good thing to do.

IRA contribution limits for 2005 and 2006 is $4000 per person. If over 50, catch up is $500 for 2005 and $1000 for 2006. As you mentioned, you will have to use post tax dollars and you can't use ROTH because your income is too high.

I am not sure the non-deductible IRA is the best idea for those in upper tax brackets. My personal feeling is to invest in a tax efficient manner in non-IRA accounts after maxing out 401(k)s. But who knows.

 

[LOL!]

I am not sure the non-deductible IRA is the best idea for those in upper tax brackets.  My personal feeling is to invest in a tax efficient manner in non-IRA accounts after maxing out 401(k)s.    But who knows.

I will be more forthright. You should not be contributing to a non-deductible traditional IRA. There are many reasons why investing in a tax efficient manner in an after-tax (i.e. non-IRA) account after maxing out 401(k)s is better.

1. Gains in the non-deductible IRA are taxed at your marginal income tax rate when you withdraw them, while gains in the after-tax account are taxed at the capital gains tax rate.
2. In general, you cannot withdraw funds from the IRA before age 59 1/2 without a penalty, while you there are no restrictions on investment in an after-tax account.
3. If you die before using your funds, your heirs will pay income taxes on your IRA money while your after-tax accounts get a stepped-up basis and are tax-free to your heirs.


I'd like to know who said a non-deductible traditional IRA was good thing to do.

Also, don't forget if you will be 50 years old on Dec 31, 2006 that you can put $20,000 into your 401(k) plan this year.

 

[Nords]

I will be more forthright.  You should not be contributing to a non-deductible traditional IRA.  There are many reasons why investing in a tax efficient manner in an after-tax (i.e. non-IRA) account after maxing out 401(k)s is better.

Gotta do the math. Every lifetime of earnings is different and your individual situation may run counter to the conventional wisdom.

Spouse and I had several years when we couldn't contribute to Roths, but we kept making non-deductible contributions to a conventional IRA. The TSP didn't come to the military until very late in the game (for me anyway) so the rest went into taxable accounts.

Now in ER, with income in the 10-15% bracket, we're converting the IRAs to Roths a little each year. We wouldn't be able to do that (and to wipe out the tax basis) if we hadn't been making non-deductible contributions all those years. When spouse's pension starts up in 15 years we'll be in a higher tax bracket, but we'll still be below the tax brackets of the '80s & '90s.

 

[bongo2]

I'll take up the defense of non-deductible traditional IRA (since I put some of my own money there).

First of all, I would only recommend a non-deductible IRA if you don't qualify for a Roth, you max out your 401k, and you already save substantially in non-tax sheltered accounts.  Some reasons why you may want to use a non-deductible IRA:

1. you plan on having a lower income soon that would allow you to convert to a Roth (virtually for free if you don't have substantial gains)
2. you want to invest in income producing assets (such as bonds)
3. you plan on having a low enough income when you withdraw that having taxable income won't matter much
4. you like to trade stocks / funds or invest in actively managed mutual funds (which aren't tax-efficient) so you won't get the long term gains rates or tax-free compounding of deferring taxable gains
5. you plan on investing long enough that the tax deferral will make up for a higher one-time tax rate
6. your tax rate for capital gains is much higher than 15% (mine, for example, is 33.5%) due to state taxes, loss of credits / deductions / exemptions, AMT etc.

As for accounts, I've been very happy with BrownCo and Vanguard.

 

[Mr._johngalt]

  When spouse's pension starts up in 15 years we'll be in a higher tax bracket, but we'll still be below the tax brackets of the '80s & '90s.

I've been asked if it does not get monotonous to have all of the answers
and be right all of the time.  My answer is  "No, it's not."

This should be "if" spouse's pension starts up.  It's all an "if" folks.

JG

 

[LOL!]

OK, I confess I have a little money in a non-deductible IRA.   I have found it a nuisance.

Some of the counter arguments by bongo2 and nords do not make sense to me.  Examples:
bongo2's point #4, I used my non-deductible IRA to trade stocks.  I lost money that I can not easily take a tax loss on.
bongo2's point #5, both the non-deductible IRA and investing in a tax-managed way (i.e. no capital gains until you sell) have tax deferral.
bongo2's point #6 about the capital gains tax rate being 33.5% might be true, but is unlikely to be true when retired and selling stock to realize capital gains.

If you are in the 10-15% tax bracket in retirement, then the capital gains tax rate is 5%.  I'm not sure if it is still true that long term capital gains tax rate will go to 0% in 2008 for low income folks. Sure Congress can change the law, but it can change the law on Roth conversions, too.

I'm not sure about IRAs being off-limits to creditors.  If they are, that would be an advantage for the IRA.

 

[Nords]

This should be "if" spouse's pension starts up. It's all an "if" folks.

Sure, but it's better to plan for taxes as if that pension was going to happen. We'll need at least six of the next 15 years to finish the conversion. Either way we'll be, at a minimum, ahead of the tax brackets and we won't have to worry about RMDs.

Thanks for the considerate thought, JG, but it can be "if", "when", or "whatever". Unlike you my ER does not depend on the income or the pension of my spouse.

 

[Foodeefish]

Thanks everyone for the insight. I am trying to figure out if you have maxed out your 401K plans, gross over $250K, have no children and  owe $140K on a $256K loan at 4.75% interest, (8 years left) where to put extra money.

We are in the 33% tax bracket and  the house is worth conservatively $750K. I am 44 and my wife is 52 and together the 401K plans have $600K in them.

Where should we put any extra money so we don't give it to Uncle Sam?

 

[LOL!]

Why not just keep fulfilling your asset allocation plan?  You have such a plan already, right?

If not, then
http://www.fundadvice.com/FEhtml/BHStrategies/0108/0108a.html
http://www.radicalguides.com/2005/06/the_radical_gui.html
might be places to start some reading.

 

[Gone4Good]

I'd look at the 4.75% rate on your mortgage as your "investment hurdle rate". As long as you think you can earn more than 4.75% before tax on alternative investments (which shouldn't be too hard) I'd leave the mortgage alone.

Do you have taxable accounts too? From your posts it seems as if a lot of your wealth is tied up in real estate and 401(k)s which may limit your financial flexibility. Having unrestricted access to a pool of money may be worth more than the tax deferral.

You should also consider how you plan to invest that money. If you are investing in bonds the tax savings on $8K / year over 10 years is going be around $3k-$5k at your current tax rate (and assuming a 15%-25% post retirement tax rate). Those savings will compound as you leave the money tax sheltered. But if you were to invest in the S&P 500 the tax savings would be far less (about $1,000) and could even be negative if the preferential treatment on capital gains and dividends is extended.