Author Topic: IRA question  (Read 3103 times)

BlueHouse

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IRA question
« on: June 22, 2014, 09:52:11 PM »
I already contribute the max (and employer portion also contributes the max) to my 401k.  If I try to contribute to an IRA also, it is not tax-deductible due to income limit.  Is it still worth it to save ~5K / year in an IRA or should I just put it into a regular account (index fund, but not an IRA)?   
I have an IRA which was created from a couple of rollovers from a few past employers.  Over the years I've contributed $5k on two separate occasions - once was tax deductible and once wasn't.  Do I have to keep track of those or are they somehow tracked by the investment company?  Does it matter - is the tax advantage realized at the time of the contribution, or over years?   

secondcor521

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Re: IRA question
« Reply #1 on: June 22, 2014, 10:42:19 PM »
Regarding your first question, my inclination would be to contribute to a Roth IRA or a deductible traditional IRA if you are able to.  If your only choice is a non-deductible traditional IRA and you don't already have one, I would personally forego that option and use just a straight taxable account and put money into an index fund that doesn't throw off much income.  If your asset allocation has you owning income-producing investments (like REITs), then it would be a lot better to own those assets within an IRA.

You are expected to keep track of the portion of your IRA that was non-deductible.  You should be informing the IRS of such contributions by filing a form 8606 with your tax return in the year in which you made that non-deductible contribution.

It matters in order to do your taxes correctly when you go to withdraw funds from your traditional IRA.  The withdrawal should be treated as coming proportionately (or ratably as they like to say) from the deductible and non-deductible portions of the IRA.

milesdividendmd

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Re: IRA question
« Reply #2 on: June 22, 2014, 10:47:00 PM »
I would argue that the correct answer is to contribute to a Roth IRA, and if you are over the income limit contribute to a backdoor Roth IRA.

http://whitecoatinvestor.com/retirement-accounts/backdoor-roth-ira/



wtjbatman

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Re: IRA question
« Reply #3 on: June 22, 2014, 11:43:38 PM »
Others have done a good job of pointing it out, but I'll just reiterate a couple things with more details.

Are you single? Married? You say if you contribute to an IRA it is not tax deductible, so I'll just assume your AGI is either more than $69,000 if you're single or more than $115,000 if you're married and filing jointly. If you're single and make less than $114,000 (or up to $129,000 for a reduced limit), contribute to a Roth IRA. If you're married filing jointly and make up to $181,000 (or up to $191,00 for a reduced limit), the same applies. Contribute to a Roth IRA.

If you make more than $191,000 a year, first of all congratulations, secondly you can still do a backdoor Roth IRA, as MDMD pointed out.

BlueHouse

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Re: IRA question
« Reply #4 on: June 23, 2014, 04:44:14 AM »
Thank you for responses. Here are some answers to questions.
I'm single and in the 33% marginal tax bracket
I ruled out Roth backdoor for two reasons:  a) I have over 200k in a rollover IRA; and b) current marginal tax rate is high.
Over the past few months on MMM, I've been reallocating between taxable and tax-advantaged accounts to rebalance in a smarter way. For the taxable accounts, I've been increasing my allocation of. regular index funds and international index funds.  For Tax advantaged , I've been transferring out of other funds to get a higher allocation of bond funds (vanguard short and intermediate bond funds). 
I've made those changes based on reading these forums.
I've been thrilled with the amount I can save through the company 401k over the past few years and it's played a huge role of helping me make up for past investment errors.  I figure I'm just now coming up even with someone my age who did everything right but who didn't have the benefit of dropping 50k in 401k for 5 years.
So I've been stashing another 2-3k each month in a regular taxable account. Should some of that go into what is called my "rollover Ira". (Vanguard named it that years ago, but I think that's where I put a few grand 10 years ago when I could deduct it). I never thought I'd be one of those people that lost track of investments, but I had so many pockets of 10-15k accounts scattered around in different places (my ideas of diversification before I found MMM). Now that I've consolidated them down into 4 separate staches, I don't know the origin of everything in the Rollover vs the "group" fund.
I'm 46. I don't think there's much chance of me needing the money before age 59.5 but I'd love to be wrong on that. I do plan to withdraw and use the bulk of my taxable funds in 6 years to pay off my mortgage if it continues to do as well as it has.
Thanks for all advice. I'm really trying to make up years of lost opportuntities and Over the past few months of reading MMM, I've moved my expected retirement age down from 74 to 60. Would love to get it lower, but Am okay with it if 60. Especially if ages 52 to 60 can be lower income due to losing the stress of worrying about a really high mortgage payment.
Thanks again for any insight.

milesdividendmd

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IRA question
« Reply #5 on: June 23, 2014, 08:00:43 PM »
2 points.

1.  You can get around the 200k in your IRA issue by rolling your IRA into your 401K.

2.  Are you sure you want to use your taxable accounts to prepay your mortgage?  You will take a huge tax hit.

Wouldn't it be more efficient to stop contributing to your taxable account and to put future payments into your mortgage.?

Better yet. If your mortgage is at a  reasonable rate and will be paid off by your retirement, just keep on investing and take the mortgage interest deduction. Cheap leverage!

BlueHouse

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Re: IRA question
« Reply #6 on: June 23, 2014, 08:51:30 PM »
2 points.

1.  You can get around the 200k in your IRA issue by rolling your IRA into your 401K.

2.  Are you sure you want to use your taxable accounts to prepay your mortgage?  You will take a huge tax hit.

Wouldn't it be more efficient to stop contributing to your taxable account and to put future payments into your mortgage.?

Better yet. If your mortgage is at a  reasonable rate and will be paid off by your retirement, just keep on investing and take the mortgage interest deduction. Cheap leverage!

Thanks Milesdividend. 
I've heard about rolling IRA back into 401k, but to be honest, I've had some questions about just who the 401k company is.  I've asked on this forum if anybody had ever heard of them (Mid Atlantic Trust Company) and I got crickets back.  I really have no idea whether I'm being Madoff'ed.  Really, how would I know?  So I have a little it of distrust and am leery of putting every penny I have into a company that has so little public info about it. 
2.  I hadn't considered the tax hit from paying off the mortgage.   Do you mean from cashing out of my taxable investment account or from losing my mortgage interest deduction, or both?  My mortgage rate is low (3.875%) but the payment is too large for me to feel comfortable even while working.  I certainly don't want to retire with this huge nut unpaid, so I hope to get it paid off and stop worrying. 
To tell you the truth, I would feel pretty comfortable getting rid of all of my cash and paying off the house because then I can't "lose it" in the markets (yeah, I'm still reeling from some really bad decisions in earlier investments). 

Appreciate the advice.  I think my biggest problem is that I feel as if I"m just reacting to everything out of fear of losing everything. 

milesdividendmd

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Re: IRA question
« Reply #7 on: June 23, 2014, 09:12:47 PM »
In general your 401K company will effect you only in your choice of retirement funds. So if you tell your company to invest all of your money in an S&P 500 fund and they don't, you are covered up to  500K (I believe) by FINRA. So if you like your investment options, you should actually be OK.

Madoff was a hedge fund. So different rules.

In terms of the tax hit , I was referring to long term capital gains that you will owe the government on your appreciation when you cash out the taxable account.

I think that your past experiences are going to make it hard for you not to panic with the next market correction. But the past performance has been pretty great for stock investors who have had the conviction to buy and hold.

Here is a nice piece about how a buy and hold strategy with retirement withdrawals fared during the terrible 00s.

http://www.rickferri.com/blog/investments/withdrawing-from-a-passive-portfolio/

As trite as it may sound, I would read a few investment books (my favorite authors are Bernstein, and Swedroe )before making any big changes to your asset allocation.

Sinking all of your wealth into a house just represents a different type of risk, and one whose sting you probably have not felt yet.