Traditional IRA query

[gregory r.]

Hi group: In a nutshell, we're 5 yrs from FIRE and now that all 3 kids are gone we're focusing on consolidating investments & more specifically building up the after tax IRA's and other savings. The query; the DW opened a few traditional after tax IRA's 8-10 years ago and has been plopping a fix amount each year into them. As I was looking to consolidate I realized that our AGI is such we don't qualify for a tax deduction on contributions; have to check our previous tax returns, not sure what our preparer did on those. Anyhow, assuming we continue to put funds into these IRA's knowing there's no deduction and any gains will be taxed as "income tax" at withdraw time, does it make sense to instead open another investment account (non-IRA qualified) and play the game at withdraw of capital gains rate (15% now) verse income tax rate, it's possible they may be the same, who knows. Do not qualify for ROTH and back door conversion doesn't make sense for us tax wise now. Any insights on whether I'm missing something is greatly appreciated. Need to build these after tax accts.......

 

[sengsational]

Not quite enough information to make a call on all points, but I'll ramble a bit, and you can come back with more details.

Take a look at your most recent 8606. That will tell you what fraction of your traditional IRA you will need to pay taxes on when you withdraw from it. Basically since you've already paid tax on the originally deposited IRA funds, that won't be taxed again, but yes, you'll be taxed some when you withdraw from it. The question is at what rate.

Whether to use the IRA might come down to whether your current marginal tax rate is higher or lower now than it will be when you pull money out. The "old thinking" was to always defer paying taxes, but now there's a lot of talk about how now might represent lower taxes than in the future.

Since you don't qualify for Roth accounts, that makes me think you have quite a bit of income? That might also mean that once you retire, you'll be spending a lot per year to keep your current lifestyle? If most of that lifestyle spending will be from after-tax funds (in other words, you have mostly after tax savings and only a small bit of tax deferred assets), then the amount you pull from deferred will be small, and you might be in a lower marginal bracket.

 

[Animorph]

Once you've maxed out your tax advantaged options, you're stuck with using the taxable account. Nothing wrong with that.

 

[pb4uski]

I would prefer taxable account to a non-deductible IRA since the taxable account is much more flexible and get preferential tax rates especially when you are in retirement if your income is low.

 

[gregory r.]

a bit more info

Actually about 80% of our portfolio is in tax deferred accounts, hence the need to beef up some after tax holdings. Collective income of 275k but AGI still disqualifies for the Roth and to do a conversion on some part I believe would not benefit us from a tax standpoint now. 33% bracket now however, home will be paid for before FIRE and our extracurricular activities are not cash sucking.......hoping to live within the 25% tax bracket or less, which in today's capital gains rate would be 15%....no crystal ball though...just trying minimize the gains tax once we FIRE

 

[gregory r.]

And thanks for the input to all!!!

 

[GrayHare]

As sengsational mentioned, review your 8606 to find out how much of your tIRA is taxable. If you've been adding after-tax money to the tIRA the pre-tax portion may be small. In that case, converting it to Roth will not cost you much in tax now, plus you'll be converting what would have been future taxable gains into tax free ones.

About 25% of our tIRA was from after-tax contribs, thus that portion had no tax due upon conversion to Roth. We converted the whole thing to Roth back in 2010. Since then its value has roughly doubled, gains that would have been taxed as ordinary income but instead are tax free thanks to Roth.

 

[ziggy29]

As tax laws change and more goodies are means tested with things like MAGI for the ACA, I think it will be more important than ever to diversify your investments into regular taxable, traditional tax-deferred and Roth-style investments. This allows you to have maximum flexibility over reportable income in order to keep your MAGI lower when necessary, and to "use up" as much of the lower tax rates as you can before switching to tax-free income when you're about to go to a higher bracket.

 

[MBAustin]

I would prefer taxable account to a non-deductible IRA since the taxable account is much more flexible and get preferential tax rates especially when you are in retirement if your income is low.

+1

We make some of our charitable donations from taxable accounts - if you are the charitable sort you could also put money into a donor advised fund now and get the tax deduction while you are in the high bracket, then give it to the charities later when the deduction is worth less to you. Just a thought.

 

[dallas27]

About 25% of our tIRA was from after-tax contribs, thus that portion had no tax due upon conversion to Roth. We converted the whole thing to Roth back in 2010. Since then its value has roughly doubled, gains that would have been taxed as ordinary income but instead are tax free thanks to Roth.

Did you do the math? Was this actually a smart financial move?



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[gregory r.]

I will check the 8606......Will also double check the value of the ROTH conversion...thanks to all for the feed back....