Author Topic: Does anyone contribute to a non-deductible IRA?  (Read 3996 times)

jrhampt

  • Handlebar Stache
  • *****
  • Posts: 1100
  • Age: 42
  • Location: Connecticut
Does anyone contribute to a non-deductible IRA?
« on: November 15, 2013, 07:14:26 AM »
Our household is past income limits for contributing to Roth IRAs or being able to deduct contributions to traditional IRAs.  We do max out both of our 401ks, and when rates come up on iBonds a bit more, we may start buying the yearly max of those as well.   I've seen a couple of posts over on the Bogleheads forum where people mention contributing to non-deductible IRAs, and I was wondering if any of you do so.  Either way, what are your reasons for contributing or not contributing? 

fiveoclockshadow

  • Stubble
  • **
  • Posts: 216
  • Location: Baltimore
Re: Does anyone contribute to a non-deductible IRA?
« Reply #1 on: November 15, 2013, 09:03:51 AM »
Unless you have a large existing traditional IRA what you should do in your situation is the "Backdoor Roth" contribution - contribute to a non-deductible and shortly there after convert to Roth (at no cost).  The income limits apply only to direct Roth contributions but you may convert to Roth regardless of income.  Silly inconsistency in the tax code.  This works as long as you don't have a large existing traditional IRA already.  Google "backdoor Roth" for details.

jrhampt

  • Handlebar Stache
  • *****
  • Posts: 1100
  • Age: 42
  • Location: Connecticut
Re: Does anyone contribute to a non-deductible IRA?
« Reply #2 on: November 15, 2013, 10:47:48 AM »
I know about the backdoor Roth, but I'm not sure the advantage of tax-free growth outweights the disadvantage of making the money less accessible.  Is it worth the hassle?

Trirod

  • 5 O'Clock Shadow
  • *
  • Posts: 80
Re: Does anyone contribute to a non-deductible IRA?
« Reply #3 on: November 15, 2013, 10:55:34 AM »
I know about the backdoor Roth, but I'm not sure the advantage of tax-free growth outweights the disadvantage of making the money less accessible.  Is it worth the hassle?

It's absolutely worth the hassle (which is minimal).  I do this every year and it's amazing how quickly it builds up inside the Roth.  Besides, after 5 years you can always get the principal out of a Roth with no penalty (just not the earnings).

I probably wouldn't contribute to a non-deductible IRA for stock investments if it wasn't for the Roth conversion.  The disadvantage is that when you do take the money out the gains are taxed at ordinary income rates.  Whereas if it was in a fully taxable account the gains and dividends would be taxed at the lower 15% rate.  For bonds it might be different, since they don't get the lower qualified dividend rates.

Cyrano

  • Stubble
  • **
  • Posts: 123
Re: Does anyone contribute to a non-deductible IRA?
« Reply #4 on: November 16, 2013, 08:22:36 AM »
If the investment is reasonably tax efficient (like a broad US stock fund), and you intend to hold it for many years, having your gains taxed as ordinary income on the back end can outweigh tax deferred growth in the meanwhile. There's a back of the envelope calculation on the Bogleheads site that concludes that for reasonable assumptions about buy and hold stock investing, the taxable account comes out ahead of a nondeductible traditional IRA.

The back door Roth is a no-brainer if you can do it, if you don't need the money for five years.

wannabfrugal

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Re: Does anyone contribute to a non-deductible IRA?
« Reply #5 on: November 18, 2013, 06:20:39 AM »
Unless you have a large existing traditional IRA what you should do in your situation is the "Backdoor Roth" contribution - contribute to a non-deductible and shortly there after convert to Roth (at no cost).  The income limits apply only to direct Roth contributions but you may convert to Roth regardless of income.  Silly inconsistency in the tax code.  This works as long as you don't have a large existing traditional IRA already.  Google "backdoor Roth" for details.

This... if you have a large existing traditional IRA there will be additional tax complications

Siamond

  • 5 O'Clock Shadow
  • *
  • Posts: 39
Re: Does anyone contribute to a non-deductible IRA?
« Reply #6 on: November 18, 2013, 03:29:52 PM »
Our household is past income limits for contributing to Roth IRAs or being able to deduct contributions to traditional IRAs.  We do max out both of our 401ks, and when rates come up on iBonds a bit more, we may start buying the yearly max of those as well.   I've seen a couple of posts over on the Bogleheads forum where people mention contributing to non-deductible IRAs, and I was wondering if any of you do so.  Either way, what are your reasons for contributing or not contributing?

I am in such a situation, maxing out 401k and so on, my MAGI is too high for opening a roth-IRA, so I am putting some money aside on two regular IRAs (one for me, one for my wife). This is growing tax-deferred, and giving me more flexibility for investments which aren't suitable for a tax-exposed investment vehicle (e.g. I have REIT ETFs in there, and I'm thinking to add some TIPS). Without such IRA vehicle, I would have more trouble complying with my target AA with my various investment accounts.

Also, when I'll early-retire, my tax bracket is going to drop quite significantly, and I will then roll-over to a roth-IRA at low cost. And 10 years from now, I'll start withdrawing some of that money tax-free. Better than paying taxes on dividends now!