Roth Alternatives?

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ggartrell
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Roth Alternatives?

Post by ggartrell »

Hi,
I'm rather new to this, so please forgive me if this is a dumb question. My current income makes me ineligible for Roth contributions. My only non-taxable account is my employer 401(k) which is maxed out. What other non-taxable options do I have, if any? Should I open up a traditional IRA? Thanks for your help.
cliffedelgado
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Post by cliffedelgado »

There are at least 2 possible options for getting money into a Roth IRA.

1) As you mentioned, open up a traditional IRA and contribute non-deductible money. Convert that to a Roth IRA

2) This is not as common as it depends on your employer 401k. Some allow you to contribute after-tax money to the 401k. And then an even smaller subset allow you to take in-service withdrawals (even with age < 59) of the after-tax amount which can then be rolled into a Roth IRA.
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House Blend
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Re: Roth Alternatives?

Post by House Blend »

ggartrell wrote: I'm rather new to this, so please forgive me if this is a dumb question. My current income makes me ineligible for Roth contributions. My only non-taxable account is my employer 401(k) which is maxed out. What other non-taxable options do I have, if any? Should I open up a traditional IRA? Thanks for your help.
Welcome to the forum.

Given that you have no other tax-advantaged accounts except your 401k (so for example, no rollover IRA), then you are in luck.

Make a non-deductible contribution to a traditional IRA.

Immediately convert it to Roth. Voila, you now have an indirect way of building a Roth. This topic comes up frequently around here. I wrote a longer post that also addresses the issues for people with existing trad IRAs: http://www.bogleheads.org/forum/viewtop ... 788#795788
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ggartrell
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Post by ggartrell »

Thanks. From your previous post, it seems like whatever amount you convert to Roth is treated as taxable income. So, if I made a contribution to a traditional IRA with after-tax dollars, and then converted to Roth, would I essentially be paying taxes twice on that money?
cliffedelgado
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Post by cliffedelgado »

ggartrell wrote:Thanks. From your previous post, it seems like whatever amount you convert to Roth is treated as taxable income. So, if I made a contribution to a traditional IRA with after-tax dollars, and then converted to Roth, would I essentially be paying taxes twice on that money?
No, there won't be double taxation. IRS will ask you how much of the conversion is after-tax money. If you don't have any other pre-tax IRAs that would invoke the pro-rata rule, then there would be no tax.
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retiredjg
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Re: Roth Alternatives?

Post by retiredjg »

ggartrell wrote:What other non-taxable options do I have, if any? Should I open up a traditional IRA?
Welcome to the forum!

I agree with the others - if you do not currently have anything called an IRA (SEP, Simple, traditional IRA) - other than a Roth IRA - you can contribute to a non-deductible traditional IRA and immediately convert it to Roth IRA without tax. This is new this year and nobody knows how long this opportunity will last.

Other options would be a HSA (Health Savings Account associated with a High Deductible Health Insurance Plan) or a 529 for the kid's college. Of course, neither of these are for retirement, but some people do use retirement "space" to hold things that should not be held in taxable.

The next option is taxable investing. This can be very useful if you put the right funds there.
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ggartrell
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Post by ggartrell »

Thanks again. On the Vanguard website's Roth Conversion Calculator, it asks how much of the conversion are non-deductible contributions. I believe that my MAGI makes all IRA contributions for me non-deductible. However, the Vanguard calculator says that I can't convert only non-deductible IRA assets and avoid paying taxes on the conversion.

I'm just trying to reconcile others' claims that I won't have to pay tax with what the Vanguard conversion calculator is telling me.
Stonebr
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Post by Stonebr »

ggartrell wrote:Thanks again. On the Vanguard website's Roth Conversion Calculator, it asks how much of the conversion are non-deductible contributions. I believe that my MAGI makes all IRA contributions for me non-deductible. However, the Vanguard calculator says that I can't convert only non-deductible IRA assets and avoid paying taxes on the conversion.

I'm just trying to reconcile others' claims that I won't have to pay tax with what the Vanguard conversion calculator is telling me.
I believe that they are saying that if you have a deductible IRA from years ago and a recently established non-ded IRA then you can't cherry pick the new one to convert. It would be a prorata conversion of both. If the only IRA you have is non-deductible, then you have no problem.

To establish the non-deductibility, however, you need to file a Form 8606 with your 1040. This would show how much non-deductible (i.e., after tax) money you squirreled away in an IRA this year.
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ggartrell
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Post by ggartrell »

I see. Thanks very helpful. My last question then is, would it be best to (i) contribute $5,000 for 2010 and convert, and then $5,000 in 2011 and convert or (ii) convert $5,000 in 2010 and another $5,000 in 2011 and then convert $10,000 in 2011?

In other words, can I convert once in 2010 and again in 2011, or do I have to do it all at once?
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retiredjg
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Post by retiredjg »

ggartrell wrote:However, the Vanguard calculator says that I can't convert only non-deductible IRA assets and avoid paying taxes on the conversion.

This is true. You can't convert only non-deductible assets if you also have deductible IRA assets. If everything you have is non-deductible, you have already paid tax on all the contributions. If there is no growth, there is no tax on earnings either. If you have earnings since you made the non-deductible contribution(s), you do have to pay tax on the earnings.
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retiredjg
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Post by retiredjg »

In other words, can I convert once in 2010 and again in 2011, or do I have to do it all at once?
You can do it all at once or you can do 100 conversions if you want. Does not matter. What does matter is that you keep up with the paperwork (you cannot take this money out for 5 years - exceptions apply) so make it easy on yourself and don't do more than one conversion a year.
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ggartrell
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Post by ggartrell »

Thanks to your responses, I'm pretty much sold on the idea of contributing to the non-deductible IRA and converting to Roth. My only question remaining is whether there are optimal types of investments for the IRA. I am 30 now and aim for an 80/20 equity/bond split. Almost all of my 401(k) is in equity index funds, and I plan on opening a brokerage account with Wells Fargo and linking to a PMA. The taxable brokerage account will likely hold mostly stock index funds. I was thinking about using the IRA to either hold bonds/tips or a VG target retirement fund. Any suggestions on what to hold in the IRA would be appreciated. Thanks.
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retiredjg
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Post by retiredjg »

Well, it sounds like you need bonds. Common suggestions are total bond market index or an intermediate bond index. Possibly mixed with TIPS.

But to really give a decent answer, you need to post your information as outlined in the Asking Portfolio Questions link below.

Some people feel you need to hold your highest expected earning funds in Roth IRA. Others say it does not matter what you hold in Roth IRA - it all evens out in the end.

You might find it more flexible to hold bonds in your 401k and hold something expensive like international or REIT in the Roth IRA.
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ggartrell
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Post by ggartrell »

Emergency funds = 20K
Debt: 80K student loans - 45K at 6.8%; 35K at 7% (ugh)

Tax Filing Status: (Single, for now but will be married next year)

Tax Rate: 28% Federal (note that next year I will be in 33%); IL resident

Age: 30

Desired Asset allocation: (80/20 - 70/30)

Intl allocation: 20% of stocks

Current portfolio - Total 20K

401k
SSgA S&P 500 Index Fund - expenses .05%- 75%
Vanguard Equity Income Fund - expenses .19% - 25%
No Employer Match

Total of All Accounts Together (not each account individually) equals 100% - All of it currently in 401(k)

New annual Contributions
$16500 - 401k
$5,000 - tIRA (which will be converted to Roth)
about $30,000 per year to save/invest otherwise
about $30,000 per year to pay student loans

Funds available in 401(k)
FIXED INCOME
SSgA Government Short Term Investment Fund
Fixed Income Fund

BONDS
PIMCO Total Return Fund

LARGE CAP STOCKS
SSgA S&P 500 Index Fund
Vanguard Equity Income Fund
Harbor Capital Appreciation Fund

SMALL/MID CAP STOCKS
FPA Perennial Fund
Royce Special Equity Fund
Rainier Small/Mid Cap Equity Portfolio

INTERNATIONAL/GLOBAL STOCKS
Vanguard Developed Markets Index Fund
Harbor International Fund
American Funds EuroPacific Growth Fund

EMERGING MARKETS
Abderdeen Emerging Markets Fund

SPECIALTY FUNDS
Van Eck Global Hard Assets Fund
PIMCO All Asset Fund

BROKERAGE
Self-Managed Account
Funds available in her 403(b)

As I said, I'm planning on opening up a brokerage with Wells Fargo, which I will have about $30K per year to invest in.

With the interest rates of my student loans, I would like to be aggressive in paying them off, unless it would be prudent to do otherwise.

Also, with regard to my emergency fund, I will probably keep $10K in cash and put the other $10K in a CD.

Moving forward, I'd like to know what investments would best be held in my 401(k) v. IRA v. taxable/brokerage
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retiredjg
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Post by retiredjg »

ggartrell wrote:se
about $30,000 per year to pay student loans

Funds available in 401(k)
FIXED INCOME
SSgA Government Short Term Investment Fund <--
Fixed Income Fund <--

BONDS
PIMCO Total Return Fund <--

LARGE CAP STOCKS
SSgA S&P 500 Index Fund
Vanguard Equity Income Fund
Harbor Capital Appreciation Fund

SMALL/MID CAP STOCKS
FPA Perennial Fund
Royce Special Equity Fund
Rainier Small/Mid Cap Equity Portfolio

INTERNATIONAL/GLOBAL STOCKS
Vanguard Developed Markets Index Fund <--
Harbor International Fund
American Funds EuroPacific Growth Fund

EMERGING MARKETS
Abderdeen Emerging Markets Fund

SPECIALTY FUNDS
Van Eck Global Hard Assets Fund
PIMCO All Asset Fund

BROKERAGE
Self-Managed Account
Funds available in her 403(b)
If I were you, I'd fill the 401k and an IRA and put all $60k of the rest of the money into loans. That would be a guaranteed 6.8% to 7% return - you cannot get any kind of guaranteed return on your investments like that.

If you really want to do some taxable investing, I would suggest you put most of the money to the loans and much less than half in taxable investing. Maybe $50k and $10k or something.

If you can give the expense ratio and the ticker symbol for the funds marked with a blue arrow, it would be helpful.
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retiredjg
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Post by retiredjg »

I guess if any of the other funds have a very low expense ratio, you could add that too. Use the edit button on your post.
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ruralavalon
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Post by ruralavalon »

Congratulations on your engagement and upcoming wedding :)

There is another another thread -- http://www.bogleheads.org/forum/viewtop ... 1289953973 --

Your desired asset allocation is within reason, for the retirement portion of your portfolio.

Short term savings goals, such as for 2 -3 years for a house, should not be in equities. A better idea might be CDs with that maturity, or short-term bond funds with that average maturity.

Can you give the expense ratios for the funds as offered in your 401k, they may be different than those available to the general public. You can add this to your original post by using the "edit" button.

The 401k is the important starting point. You need to select the best available funds from the limited options in the 401k, and then fill out the asset allocation with the unlimited choices in your Roth and any taxable account.

IMO it is a good idea to be aggressive in paying down those student loans (6.8 & 7%) or any other high interest debt. Do this ahead of any taxable investing.

BTW why a brokerage account for your taxable account, and why Wells Fargo? My suggestion would be a taxable account with Vanguard, for the broad selection of low cost index funds available there without brokerage expenses.

Also, what funds (with expense ratios and tickers) are available in her 404b?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Topic Author
ggartrell
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Post by ggartrell »

BTW why a brokerage account for your taxable account, and why Wells Fargo? My suggestion would be a taxable account with Vanguard, for the broad selection of low cost index funds available there without brokerage expenses.
The main reason I was looking at the Wells Fargo account would be to access the 100 annual free trades with the linked brokerage. This way, if I decided to go with ETF's I would be able to do so w/o the expenses. However, would I still be able to access Vanguard funds from my Wells Fargo account?

I guess I could be more aggressive in paying my loans. The only thing is that while I am in a somewhat lucrative job right now, I don't really anticipate being in this position for more than 4 years. So, I figure that I should simultaneously save/invest and be somewhat aggressive in paying my loans. Thanks for your help.[/quote]
Default User BR
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Post by Default User BR »

ggartrell wrote:The main reason I was looking at the Wells Fargo account would be to access the 100 annual free trades with the linked brokerage. This way, if I decided to go with ETF's I would be able to do so w/o the expenses. However, would I still be able to access Vanguard funds from my Wells Fargo account?
The PMA deal applies to mutual funds that they carry as well as ETFs or stocks. However, WF doesn't have most Vanguard Admiral share classes for index funds available, so you can't take advantage of the new lower minimums there. So it will depend on what you want.



Brian
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