What is the benefit of an IRA past the income limits?

[Cornel_Westside]

Hi, recently I realized with my bonus that I am only partially eligible for Roth IRA contributions. I'll have to correct that before my taxes. So I was thinking I'd want to switch to a Traditional IRA, but then I realized that I'm above the income limits for deducting it from my income since I have an employer sponsored retirement plan. So I could make non deductible contributions to a Traditional IRA, but I'm not sure that makes sense.

A traditional IRA contribution that isn't deductible means I've paid taxes on the money, then am putting it an investment vehicle in which at the end I'll pay ordinary income tax on the earnings. Under current tax law that means I'll likely pay 12% on the earnings. If I simply took this money and funded a taxable brokerage account, with long term capital gains, I'll be taxed 15% on the earnings. Obviously it would be better to pay less in taxes, but I'm also making that money harder to access. I'll have to do a Roth conversion ladder and the money will be inaccessible for 5 years. I was already planning on doing a Roth conversion ladder, so it is probably still the best call. But I'm just wondering if there is something I'm missing and potentially losing some liquidity in pursuit of 3% less in taxes on earnings. If there are other downsides to a non-deductible Trad IRA contribution or other upsides to a taxable investment, it may make a difference to me.

Can anyone offer any advice on this?

[seattlecyclone]

As you point out, a non-deductible IRA isn't often a great thing on its own, as the taxes on the growth tend to be higher than what you would get from a regular taxable account. However this is the first step of the backdoor Roth IRA. Make a non-deductible traditional contribution, convert it to Roth, and it's as good as if you had been allowed to contribute directly to Roth. The big caveat is that due to pro-rata rules on Roth conversions, this maneuver only really works if you currently have nothing in traditional IRAs already. 401(k)s don't count toward this calculation, so a common first step is to roll over any pre-tax IRA balance into a 401(k).

[Cornel_Westside]

I can't have any money in any traditional IRAs, including rollover IRAs? There's no aspect of separate accounts that can help, it has to be pro-rata based on all Trad IRAs?

[dandarc]

I can't have any money in any traditional IRAs, including rollover IRAs? There's no aspect of separate accounts that can help, it has to be pro-rata based on all Trad IRAs?

Yep. And if you have any SEP or SIMPLE IRAs, those count too, even though they are employer-sponsored plans.