Non-deductible Traditional IRA--can I withdraw contributed amounts

[Lucky Girl]

Looking ahead to the five year window between RE and when Roth Conversions kick in, and trying to figure out what money I can access without penalty.  We are high earners, so we do not receive a deduction for money contributed to a Traditional IRA, but have stached a lot there over the years.  Can we take the money contributed (not gains) out without penalty or taxes?  We have of course already paid income tax on the amount going in since it is Traditional, so it seems like we should be able to access it immediately, but I want to make sure I'm not missing anything.   

Thanks!

[seattlecyclone]

The non-deductible traditional IRA has a pro-rata rule that allocates any distribution proportionally between pre-tax and post-tax amounts. If you have only post-tax funds in there, you can withdraw it or convert it to Roth with no tax due. This is why the backdoor Roth works. However if you have allowed the money to grow inside the traditional IRA, you now have some pre-tax money in there as well. If, for example, you have contributed $50k over the years and the account is now worth $100k, you would have to pay tax and an early withdrawal penalty on half of whatever amount you decided to withdraw.

[Lucky Girl]

That was not the answer that I wanted to hear, but good to know.  Thanks seattlecyclone. 

I am starting to wonder if we should no longer contribute to the TIRA at all.  The only benefit is that there is no tax on gains, but we put it in VTSAX every year and forget it--no taxable event anyway.  Seems like it makes more sense to just use a standard taxable account so we can access it much earlier, right?

[terran]

I could be wrong, but won't the gains be taxed at regular income rates which are almost always more than capital gains rates? Seems like contributing to a non-deductible IRA would always be a poor choice unless you're using it to do backdoor roth contributions.

[seattlecyclone]

I could be wrong, but won't the gains be taxed at regular income rates which are almost always more than capital gains rates? Seems like contributing to a non-deductible IRA would always be a poor choice unless you're using it to do backdoor roth contributions.

Yes, the gains are taxed at regular income tax rates. Immediately converting to Roth is generally the best thing to do after making non-deductible IRA contributions. The higher tax rate you pay at the time of withdrawal is partly offset by the fact that you don't need to pay dividend taxes in the interim, but even then a taxable account is probably better in the long run than a non-deductible traditional IRA.