Should I invest in a Trad IRA if it is not deductible?

[Olav23]

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!

 

[jdw_fire]

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.

 

[ats5g]

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

 

[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 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!

 

[retire@40]

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.

 

[Olav23]

pssssst....that's why we are all here. To figure out how to retire early so that doesn't happen.

Touche, sir!

 

[ats5g]

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In a non-deductible IRA, you get no upfront tax deduction, and all the gains are taxed like ordinary income when withdrawn.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

 

[Nords]

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.

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.

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...

 

[kaudrey]

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

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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.

 

[d]

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.

 

[mb]

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