Are Traditional IRAs useless if I have a 401K?

[supersaver]

My employer has a 401k option that I put money into each month. I have read that if you make more than $60,000 a year and have an employer sponsored retirement plan, like I do, that you cannot tax-deduct any contributions to an IRA.

Is this true? Does this make a traditional IRA worthless for me? I can see why a Roth would still be useful, since it is after-tax money in the first place.

What are the benefits of putting money into an IRA account if it is not deductible, as opposed to say putting it into a regular brokerage account? Thanks.

 

[work4beer]

Not necessarily, because in future years you might be able to rollover your contributions and gains into a Roth. Just make sure that you file form 8606 with your taxes to track your basis, so that portion is not taxed when you rollover.

I think the income limits are loosening up in 2010 to make it easier to do this. Currrently you would want to wait for a low income year before doing the rollover.

So for example, you could contribute $4K to a traditional IRA for 5 years, then have a low income year and rollover the $20K tax free, and pay income taxes on, say $10K gains, and end up with $30K in a Roth.

 

[Andre1969]

What are the benefits of putting money into an IRA account if it is not deductible, as opposed to say putting it into a regular brokerage account? Thanks.

One advantage of putting money into a traditional IRA, even if you don't get a tax benefit from it initially, it still grows and compounds tax-deferred. As a result, when it comes time to start cashing it out, it should have grown to a much larger amount than it would have if the gains got taxed every year.

 

[supersaver]

Andre, thanks for the reply, I will open one then.

Beer, I don't think I will be able to roll into a Roth because within a few years my salary will be more than $120,000 or whatever the limit is for Roths. However, I am interested in learning about this 8606 form. I do not know much about doing taxes efficiently, but is this form a must to fill out if I have an IRA? Thanks for any info. I just don't want to get screwed on any tax advantages out there.

 

[Khan]

Andre, thanks for the reply, I will open one then.

Beer, I don't think I will be able to roll into a Roth because within a few years my salary will be more than $120,000 or whatever the limit is for Roths. However, I am interested in learning about this 8606 form. I do not know much about doing taxes efficiently, but is this form a must to fill out if I have an IRA? Thanks for any info. I just don't want to get screwed on any tax advantages out there.

It should be filled out when you make a non-deductible contribution to a traditional IRA.

 

[supersaver]

It should be filled out when you make a non-deductible contribution to a traditional IRA.

So I need to fill out this form twice a month if I make contributions twice a month?

 

[Khan]

So I need to fill out this form twice a month if I make contributions twice a month?

I think once a year is sufficient.

 

[Alan]

Ever since I starting maxing out 401(k) contributions and could afford to contribute to an IRA I have done so even though it has always been after tax money.

I figure that it is going to grow tax deffered so it is still worth doing. After after RE it can still be converted to a Roth if that makes sense.

The 8606 form is easy - Turbo Tax and the like copy your basis from the year before and you enter what you put in after tax in the currrent year. Easy peasy.