Options regarding the Non-Deductible IRA

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Topic Author
Compounding
Posts: 52
Joined: Sat Mar 03, 2007 6:26 pm
Location: Charlotte, NC

Options regarding the Non-Deductible IRA

Post by Compounding »

I've done a lot of research on this, so hopefully my questions aren't redundant to what's out there already. I expect in 2011 to hit the income level that would disallow me from my Roth IRA contribution. My wife's situation is more agreeable to the "back door" Roth as she has a Vanguard 401k. For me its out of the question to move all those IRA assets to my crappy 401k plan, so I must choose between non-deductible vs taxable. My questions:

- Does an INHERITED IRA count toward the "pro-rata share of all IRAs in aggregrate rule" when calculating the tax of a non-deductible IRA being withdrawn? It can't be rolled over to a 401k as it has different rules, but does it affect the taxability of the Back Door Roth conversion for my wife? Most documentaton simply refers to adding up "all non-Roth IRAs" when figuring your non-deductible percentage on withdrawls.

- I have a Rollover IRA with Vanguard. Does it matter if I make a non-deductible contribution in a seperate traditional IRA account or combine it with the existing Rollover IRA, since when the assets are withdrawn the non-deductible/deductible contribution ratio will be considered on all my non-Roth IRA's collectively. I know it may effect my future eligibility to roll the entire rollover into another 401k plan, but I highly doubt I'll ever need to do that.

- I'm assuming that if I put in my IRA only the least tax-effiecient assets (REITS, TIPS, taxable bonds) that the tax deferral of a non-dedubtible IRA is worth it vs the taxable alternative - as I am minimizing the longterm capital gains and qualified dividends that the IRA would turn into nominal income. Thoughts?
quadz42
Posts: 24
Joined: Sun Nov 14, 2010 4:42 pm

Post by quadz42 »

Not sure about the inherited IRA, but I would guess that it would receive the same treatment as any other deductible IRA account.

I would suggest making a non-deductible contribution in a separate IRA account, so you have the optionality of converting in the future. It's possible that you could change employers at some point.

Assuming that you are maxing out your deductible contributions (i.e. 401k), then I would agree that a non-deductible IRA makes sense for tax deferral, assuming that you have the cash flow capability. Just remember that you can't withdraw the contributions tax free, because you have a Rollover IRA as well (pro-rata rule).
Topic Author
Compounding
Posts: 52
Joined: Sat Mar 03, 2007 6:26 pm
Location: Charlotte, NC

Post by Compounding »

In researching an answer to my own question - I don't think an Inherited IRA counts toward all the other non-Roth IRAs when figuring the non-deductible/deductible prorata ratio and basis. This is from one of the steps in IRS Form 8606:

"Enter the value of all your traditional, SEP, and SIMPLE IRAs as of
December 31, 2010, plus any outstanding rollovers"

No mention of Inherited IRAs - which would make sense considering you can't combine them with other IRAs or contribute to them - in effect the Inherited IRA is "not your own".
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