Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Should I have separate accounts for Deductible and Non-Deductible IRA contributions?
Old 04-08-2017, 10:40 PM   #1
Thinks s/he gets paid by the post
 
Join Date: Dec 2010
Location: California
Posts: 1,002
Should I have separate accounts for Deductible and Non-Deductible IRA contributions?

Over the last few years, I've concentrated on funding/maxing company 401k, roth ira, paying off all mortgages (personal and investment real estate), and increasing taxable accounts. I felt the taxable accounts were important for funding early retirement years (age 50 - 59.5) if needed.

I find myself with extra cash to invest, so I'm considering non-deductible IRA contributions for DW and myself for 2016 & 2017. We have Rollover IRAs and 401ks that have not been taxed so backdoor Roth isn't a good option at this time. I'm guessing, I won't need to touch this money for 15 - 20 years, if ever, besides RMD.

Should I have separate Deductible and Non-Deductible IRA accounts for DW and I to keep the bookkeeping easier for us? Or, should I just add to my existing Rollover IRA and the Form 8606 deals with the bookkeeping.

For example: Deductible IRA $$ in Vanguard and Non-Deductible IRA $$ at Fidelity.
__________________

Aiming_4_55 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!

Old 04-09-2017, 02:19 AM   #2
Thinks s/he gets paid by the post
 
Join Date: Dec 2010
Location: Midwest
Posts: 1,644
Someone recently mentioned putting the deductible IRA type contributions in the older person's account since they will be the first eligible for age 59-1/2 withdrawals. Makes sense to put the non-ded. in younger persons name first with that strategy.

Lots of other questions, but that is all I can contribute.
__________________

brucethebroker is offline   Reply With Quote
Old 04-09-2017, 04:02 AM   #3
Thinks s/he gets paid by the post
Dash man's Avatar
 
Join Date: Mar 2013
Location: Limerick
Posts: 2,557
The only reason I see an advantage for separate brokerages is protection from one of the brokerages going under in some kind of financial crisis. Separating funds into tIRA/Roth/after tax accounts allows you some tax management options when you want to rollover tIRA/401k money into a Roth account by allowing you to keep your tax rate lower by living on the already taxed money, and just paying taxes on the rollover funds. Too high a pension, interest, rental income, etc. may still push you into a higher tax bracket, but you'd have to decide whether the tax bracket is worth doing a rollover or not. Nice problem to have, though. Our goal is to try to minimize tax bracket we'll be in when we hit RMDs in ten years, while maximizing overall income.
Dash man is offline   Reply With Quote
Old 04-09-2017, 04:32 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 25,498
AFAIK, because I haven't done this, when it comes to withdrawing the funds, the basis for non-deductible contributions is applied across all IRAs owned by the individual who made the non-deductible contribution.

I would question making non-deductible IRA contributions in the first place, since it requires extra record keeping for a long time, and somewhat complicates Roth conversions, and ultimately RMDs.

Why not invest the funds in taxable accounts and put it in something that's super tax efficient- such as equities/ETF that doesn't generate much in qualified divs or municipal bond fund? Just let your taxable accounts grow more, especially if your tax-deferred accounts are much larger than your taxable ones.

Some folks aim more for around a 50/50 ratio between taxable and tax-deferred accounts to avoid having most of their income taxed at ordinary rates once retired. Taxable accounts can have quite favorable tax treatment such as part of the income taxed at capital gains tax rates, and once retired, possibly a large chunk subject to 0% rate if the ordinary income is low enough. And if tax efficient, you can minimize the income thrown off and take advantage of tax loss harvesting on occasion to lower taxes.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 04-09-2017, 05:30 AM   #5
Thinks s/he gets paid by the post
 
Join Date: Jul 2002
Posts: 1,283
Quote:
Originally Posted by Aiming_4_55 View Post

Should I have separate Deductible and Non-Deductible IRA accounts for DW and I to keep the bookkeeping easier for us? Or, should I just add to my existing Rollover IRA and the Form 8606 deals with the bookkeeping.

For example: Deductible IRA $$ in Vanguard and Non-Deductible IRA $$ at Fidelity.
Any after tax contributions to an IRA will require dealing with the Form 8606. Does not matter if you open a separate account or not. When taking any withdrawals from any one of your IRAs, you must total ALL IRA balances to determine what portion of your after tax contributions is returned as part of each years withdrawal.

All this is done on an individual basis.
RE2Boys is offline   Reply With Quote
Old 04-09-2017, 06:12 AM   #6
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Posts: 2,428
As others have noted, you each can have one traditional IRA no matter how many accounts you have funded. It is important to track the amount of the basis in each persons IRA. One place this is recorded is on your 8606 tax form. It is important to keep these records to support taking credit for the prorated tax basis when you withdraw or roth convert the IRA.

In short, keeping the tax basis in a separate account for each person really makes little difference. There is no tax benefit. As some noted, whose account may have some different tax effects.

Likely a bigger question is if you should fund traditional IRAs any longer. Eventually you will have to take RMDs. What do the taxes look like when you hit that point? Will you be in a higher or lower tax rate at that time? A look at your longer term tax plan would provide some insight. In the long run which way are your taxed higher?
bingybear is offline   Reply With Quote
Old 04-09-2017, 07:58 AM   #7
Thinks s/he gets paid by the post
 
Join Date: Dec 2010
Location: California
Posts: 1,002
Quote:
Originally Posted by brucethebroker View Post
Someone recently mentioned putting the deductible IRA type contributions in the older person's account since they will be the first eligible for age 59-1/2 withdrawals. Makes sense to put the non-ded. in younger persons name first with that strategy.

Lots of other questions, but that is all I can contribute.
Thanks for the suggestion. DW and I are about a month apart in age, so this doesn't impact us as much.
Aiming_4_55 is offline   Reply With Quote
Old 04-09-2017, 08:02 AM   #8
Thinks s/he gets paid by the post
 
Join Date: Dec 2010
Location: California
Posts: 1,002
Quote:
Originally Posted by Dash man View Post
The only reason I see an advantage for separate brokerages is protection from one of the brokerages going under in some kind of financial crisis. Separating funds into tIRA/Roth/after tax accounts allows you some tax management options when you want to rollover tIRA/401k money into a Roth account by allowing you to keep your tax rate lower by living on the already taxed money, and just paying taxes on the rollover funds. Too high a pension, interest, rental income, etc. may still push you into a higher tax bracket, but you'd have to decide whether the tax bracket is worth doing a rollover or not. Nice problem to have, though. Our goal is to try to minimize tax bracket we'll be in when we hit RMDs in ten years, while maximizing overall income.
While it's a good problem to have, we have rental income that is making the lower W2 years of semi-ER or ER years challenging for Roth conversions. One of the reasons for me to strongly consider a non-deductible IRA contribution now.
Aiming_4_55 is offline   Reply With Quote
Old 04-09-2017, 08:25 AM   #9
Thinks s/he gets paid by the post
 
Join Date: Dec 2010
Location: California
Posts: 1,002
Quote:
Originally Posted by audreyh1 View Post
.... the basis for non-deductible contributions is applied across all IRAs owned by the individual who made the non-deductible contribution.

I would question making non-deductible IRA contributions in the first place, since it requires extra record keeping for a long time, and somewhat complicates Roth conversions, and ultimately RMDs.

Why not invest the funds in taxable accounts and put it in something that's super tax efficient- such as equities/ETF that doesn't generate much in qualified divs or municipal bond fund? Just let your taxable accounts grow more, especially if your tax-deferred accounts are much larger than your taxable ones.

Some folks aim more for around a 50/50 ratio between taxable and tax-deferred accounts to avoid having most of their income taxed at ordinary rates once retired. Taxable accounts can have quite favorable tax treatment such as part of the income taxed at capital gains tax rates, and once retired, possibly a large chunk subject to 0% rate if the ordinary income is low enough. And if tax efficient, you can minimize the income thrown off and take advantage of tax loss harvesting on occasion to lower taxes.
Thanks. I think the recordkeeping will be a PITA and challenging if someone else had to pick it in the event something happened to me. I'm thinking of staying with further investing into my taxable account for most of the reasons that you listed. Besides real estate and Roths/HSAs, we are about 50% Taxable/50% 401k so having access to $$ in ER is not as much of a challenge.

At the current moment, if we had to rely only on withdraws of the taxable account we should be able to get to age 60 and beyond, so penalty free withdraws from 401k/IRAs will be available when needed. We also have rental income, so tax deferred accounts might not get touched for a very long time except for Roth conversions. It's a long time, but I'm thinking the RMD is a bigger concern impacting the tax bracket in the future.
Aiming_4_55 is offline   Reply With Quote
Old 04-09-2017, 08:36 AM   #10
Thinks s/he gets paid by the post
 
Join Date: Dec 2010
Location: California
Posts: 1,002
Quote:
Originally Posted by RE2Boys View Post
Any after tax contributions to an IRA will require dealing with the Form 8606. Does not matter if you open a separate account or not. When taking any withdrawals from any one of your IRAs, you must total ALL IRA balances to determine what portion of your after tax contributions is returned as part of each years withdrawal.

All this is done on an individual basis.
I bolded the above that is a concern. I was wondering if the separate accounts would help, but it's probably not worth it. Is there any benefit in respect to an inherited IRA or will the same apply? Say, if I had a separate non-deductible funded IRA and passed that onto my kids in the event of expiring?

While I plan to enjoy myself, I am slowly coming to the good reality that we have enough to fund a lifestyle that is good for us, and having some left over. One day, I'll have to truly invest enough time to figure out the best approach with leaving depreciated real estate, Roth IRA, and IRA with the least amount of headaches to DW and kids.
Aiming_4_55 is offline   Reply With Quote
Old 04-09-2017, 08:39 AM   #11
Thinks s/he gets paid by the post
 
Join Date: Mar 2013
Location: Coronado
Posts: 1,675
There is no advantage to opening a second IRA account for the non-deductible contributions. Even if you only had one IRA and all your contributions had been after-tax money, you'd still have to track the basis so you could pay taxes on the growth when you withdraw it. If you're tracking the basis anyway, it's just as easy to do it in your existing account as to open a new one.

If you do your own taxes with TurboTax, then form 8606 is automatically filled out for you and the basis calculation is carried over from year to year. It literally takes me less than 2 minutes to answer the relevant questions every year, so having this one extra form is just not that big a deal to me.
cathy63 is online now   Reply With Quote
Old 04-09-2017, 09:01 AM   #12
Thinks s/he gets paid by the post
 
Join Date: Dec 2010
Location: California
Posts: 1,002
Quote:
Originally Posted by bingybear View Post
Likely a bigger question is if you should fund traditional IRAs any longer. Eventually you will have to take RMDs. What do the taxes look like when you hit that point? Will you be in a higher or lower tax rate at that time? A look at your longer term tax plan would provide some insight. In the long run which way are your taxed higher?
Thanks BingyBear. I'm not even age 50 yet and thinking of how will I fund the rest of my life on a Sunday morning is a bit nuts, but I have thought about it.

At semi ER or ER in about 2 years, age 50, I have thoughts like:

Semi-ER - without much effort, I will have opportunities to do consulting or contracting work at $125 - $175/hour. With kids in school, travel will be restricted, so the extra money could be nice after taking a good break.

Current Rentals - will fund ER targeted budget, estimated $75 - 80k a year
Taxable accounts - estimated SWR of 3.5%, $60 - $70k available, if needed
401ks/IRAs - estimated $1M targeted in 2019, Roth conversions will need to be determined each year (Age 50 - 70) based on tax rate
Roth/HSA - currently $180k, small but no plans to touch for a long time

With this, is further investing in my Taxable account the no brainer choice?
Aiming_4_55 is offline   Reply With Quote
Old 04-09-2017, 09:04 AM   #13
Thinks s/he gets paid by the post
 
Join Date: Dec 2010
Location: California
Posts: 1,002
Quote:
Originally Posted by cathy63 View Post
If you do your own taxes with TurboTax, then form 8606 is automatically filled out for you and the basis calculation is carried over from year to year. It literally takes me less than 2 minutes to answer the relevant questions every year, so having this one extra form is just not that big a deal to me.
Then, I'm committed to filing taxes every year just teasing.

Phone a friend....is that your answer? Go with non-deductible IRA contribution vs Taxable.
Aiming_4_55 is offline   Reply With Quote
Old 04-09-2017, 09:07 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 25,498
Quote:
Originally Posted by Aiming_4_55 View Post
Thanks. I think the recordkeeping will be a PITA and challenging if someone else had to pick it in the event something happened to me. I'm thinking of staying with further investing into my taxable account for most of the reasons that you listed. Besides real estate and Roths/HSAs, we are about 50% Taxable/50% 401k so having access to $$ in ER is not as much of a challenge.

At the current moment, if we had to rely only on withdraws of the taxable account we should be able to get to age 60 and beyond, so penalty free withdraws from 401k/IRAs will be available when needed. We also have rental income, so tax deferred accounts might not get touched for a very long time except for Roth conversions. It's a long time, but I'm thinking the RMD is a bigger concern impacting the tax bracket in the future.
You can lower the taxable income from taxable accounts if you invest with taxes in mind. And even when you do pay some tax, it is usually far less than if you were drawing the equivalent amount from a tax-deferred account.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 04-09-2017, 09:41 AM   #15
Thinks s/he gets paid by the post
Fedup's Avatar
 
Join Date: Mar 2014
Location: Southern Cal
Posts: 4,032
This thread reminds me I need to file and keep my 8606 up to date every year. I don't know when I last had it filed. Any penalty for filing late on form 8606. Like I had an immediate conversion from a non deductible IRA to Roth IRA. I don't know if I did anything. In my mind I was not owing tax. How late can you file it. I just have to do it.
Fedup is offline   Reply With Quote
Old 04-09-2017, 10:35 AM   #16
Thinks s/he gets paid by the post
 
Join Date: Mar 2013
Location: Coronado
Posts: 1,675
Quote:
Originally Posted by Aiming_4_55 View Post
Then, I'm committed to filing taxes every year just teasing.

Phone a friend....is that your answer? Go with non-deductible IRA contribution vs Taxable.
I don't know whether it's better to do the non-deductible IRA vs the taxable account. I was just saying you probably shouldn't consider form 8606 to be a huge deterrent.

My own situation is actually somewhat similar to yours only we're a few years down the road. I'm 54, DH is 55. We each retired at age 53.

We both maxed out our 401Ks at work every year and also saved money in a taxable account. Years ago, we chose to open non-deductible IRAs. There was not any major analysis put into that decision. Back then the max contribution was, I think, $2500, and it was just one more way to invest a little money without having to immediately pay tax on the earnings.

Then Roth IRAs came along. This seemed like a great thing for us and we jumped on the opportunity to get tax-free growth instead of putting money in the tIRAs. Except, after the first year we had too much income and couldn't contribute anything to the Roths, so we went back to using the tIRAs.

Then a few years later the law changed to allow conversion from tIRAs. This was perfect for DH as most of his tIRA was already post-tax money and we just had to pay tax on the gains in order to convert it and then he could use the back-door conversion every year. However, I had changed jobs and rolled over a couple of 401Ks so my tIRA had a mix of pre- and post-tax money and converting it all at once would be a huge tax hit. Later on, after DH retired and rolled over his 401K, I made spousal contributions to his tIRA so he also has a mix.

So here we sit now with a taxable account, 2 Roths and 2 mixed tIRAs. I can't really say if it was a mistake to start putting that non-deductible money into the tIRAs back then, though I might do things differently now. We had no idea that Congress was going to invent Roths or Roth conversions. It's just what we have at this point in time, and as long as the laws don't change again (hah!), it really isn't that onerous to deal with it.
cathy63 is online now   Reply With Quote
Old 04-09-2017, 11:33 AM   #17
Thinks s/he gets paid by the post
Fedup's Avatar
 
Join Date: Mar 2014
Location: Southern Cal
Posts: 4,032
I stopped contributing to non deductible IRA when I found out the tax situation with other existing IRA. One of the reasons I took my last job was so that I could transfer my IRA back to 401k account and that outside of my 401k, I only had non-deductible IRA. Thank goodness I got out of that mess and headache. I blamed the media for not mentioning that problem when they often touted about non-deductible IRAs.
Fedup is offline   Reply With Quote
Old 04-09-2017, 02:39 PM   #18
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 4,010
Quote:
Originally Posted by Aiming_4_55 View Post
...................... Go with non-deductible IRA contribution vs Taxable.
If you are doing non-deductible IRA looking to do Roth conversions in the future, that might be ok. If you are not going to do Roth conversions, efficient taxable accounts might be better. Gains can be LTCG and dividends could be QDIV (and tax could be 0 if in 15% bracket) whereas withdrawals from IRA are ordinary income. If you are going to invest in fixed income vehicles, the non-deductible IRA could be ok.........inside IRA, the earnings are tax-deferred but in a taxable account, they would be taxed at ordinary income rates.
kaneohe is offline   Reply With Quote
Old 04-09-2017, 03:03 PM   #19
Thinks s/he gets paid by the post
 
Join Date: Jun 2016
Posts: 3,746
Quote:
Originally Posted by RE2Boys View Post
Any after tax contributions to an IRA will require dealing with the Form 8606. Does not matter if you open a separate account or not. When taking any withdrawals from any one of your IRAs, you must total ALL IRA balances to determine what portion of your after tax contributions is returned as part of each years withdrawal.

All this is done on an individual basis.
+1 If you use TurboTax or the like, it's easy to track your 8606 over the years.
COcheesehead is offline   Reply With Quote
Old 04-09-2017, 06:43 PM   #20
Thinks s/he gets paid by the post
 
Join Date: Dec 2010
Location: California
Posts: 1,002
Quote:
Originally Posted by COcheesehead View Post
+1 If you use TurboTax or the like, it's easy to track your 8606 over the years.
This is on me. The sad part is, I believe I have some non-deductible IRA funds, but since I took a break from contributions, I have no clue how much. I guess I'll have to dig up some old tax returns.
__________________

Aiming_4_55 is offline   Reply With Quote
Reply


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
Non-deductible (after tax) tIRA Contributions Delawaredave5 FIRE and Money 16 03-03-2015 11:25 PM
Joint v Separate Accounts? Sassy FIRE and Money 55 06-05-2013 05:45 PM
Non-deductible IRA and 8086 IRS form - arrgh!! wilkens21 Young Dreamers 14 01-10-2008 06:13 PM
?? for uber-savers, non-deductible IRA to Roth IRA in 2010 LOL! FIRE and Money 8 12-21-2006 01:25 AM
Non-deductible 401k contributions friendlygirl FIRE and Money 3 07-01-2002 10:01 AM

» Quick Links

 
All times are GMT -6. The time now is 09:11 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2020, vBulletin Solutions, Inc.
×