IRA Help

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IRA Help

Postby Dopey » Sat Feb 09, 2013 9:26 am

I have a hypothetical question.

What if you have substantial assets in Trad IRAs and participate in an employer sponsored plan. Your income is too high to contribute to a Roth or get any deduction for new trad IRA contributions. The substantial assets in a Trad IRA don't make a backdoor roth an ideal option.

Where do you invest?
Do you still put the $5500 in a Trad IRA without the deduction? Even though it grows tax free, does the principle essentially get taxed a second time upon withdraw?
Do you move forward with the backdoor roth and bite the bullet on the rollover?
Invest in taxable accounts only?

I'm not in this situation currently, but I'm reading up on backdoor roths and such as I suspect our income to be above these levels within the next decade.

Thanks for the tips and feel free to correct any faulty assumptions I've made.
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Re: IRA Help

Postby Penguin » Sat Feb 09, 2013 9:46 am

Transfer the traditional IRA to the employer plan. Then do a backdoor Roth.
http://www.bogleheads.org/wiki/Backdoor_Roth_IRA
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Re: IRA Help

Postby damjam » Sat Feb 09, 2013 9:52 am

Rammer wrote:Do you still put the $5500 in a Trad IRA without the deduction? Even though it grows tax free, does the principle essentially get taxed a second time upon withdraw?
Do you move forward with the backdoor roth and bite the bullet on the rollover?
Invest in taxable accounts only?

If you can't do a backdoor Roth because the tax hit would be too great (you have substantial tIRA assets that you can't rollover for some reason)then you invest in taxable accounts.
Non-deductible traditional IRA contributions are not a great idea unless you can do the backdoor Roth. The principal does not get taxed twice, since you would be tracking your basis (original non-deductible contribution) on form 8606.
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Re: IRA Help

Postby Dopey » Sat Feb 09, 2013 10:13 am

damjam wrote:
Rammer wrote:Do you still put the $5500 in a Trad IRA without the deduction? Even though it grows tax free, does the principle essentially get taxed a second time upon withdraw?
Do you move forward with the backdoor roth and bite the bullet on the rollover?
Invest in taxable accounts only?

If you can't do a backdoor Roth because the tax hit would be too great (you have substantial tIRA assets that you can't rollover for some reason)then you invest in taxable accounts.
Non-deductible traditional IRA contributions are not a great idea unless you can do the backdoor Roth. The principal does not get taxed twice, since you would be tracking your basis (original non-deductible contribution) on form 8606.


Ok, I guess I didn't realize you could do this. If so, then why would one rather invest in taxable? Wouldn't a non-deductible IRA at least allow the earnings to grow tax free?

Also, I'm looking into my employer's plan and it doesn't explicitly say they allow Trad IRA transfers in. Is this typical?
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Re: IRA Help

Postby damjam » Sat Feb 09, 2013 10:39 am

Rammer wrote:
damjam wrote:
Rammer wrote:Do you still put the $5500 in a Trad IRA without the deduction? Even though it grows tax free, does the principle essentially get taxed a second time upon withdraw?
Do you move forward with the backdoor roth and bite the bullet on the rollover?
Invest in taxable accounts only?

If you can't do a backdoor Roth because the tax hit would be too great (you have substantial tIRA assets that you can't rollover for some reason)then you invest in taxable accounts.
Non-deductible traditional IRA contributions are not a great idea unless you can do the backdoor Roth. The principal does not get taxed twice, since you would be tracking your basis (original non-deductible contribution) on form 8606.


Ok, I guess I didn't realize you could do this. If so, then why would one rather invest in taxable? Wouldn't a non-deductible IRA at least allow the earnings to grow tax free?

Also, I'm looking into my employer's plan and it doesn't explicitly say they allow Trad IRA transfers in. Is this typical?


If you are investing in bonds or REITS (or other tax-inefficient asset) then a non-deductible tIRA may make sense depending on your assumptions. However if you are investing in stock you loose the ability to get the preferred capital gains rates when you withdraw earnings from the tIRA. All withdrawals from tIRAs are taxed at ordinary marginal tax rates. When investing in stocks in taxable you essentially get tax-deferral since no tax is due on capital gains until you sell (dividends are taxed as you receive them, also at preferred rates if qualified).

Not all employers plans accept rollovers of IRA funds. You have to check you plan documents or check with you plan administrator.
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Re: IRA Help

Postby MN Finance » Sat Feb 09, 2013 11:34 am

Investing in the non-deductible IRA can have an advantage if time is on your side since compounding will outweigh the taxable account over time. OTOH, it creates a permanent record keeping issue since your IRAs will be potentially forever then a blend of pre/post tax money. It also might depend how much money is in retirement and non-retirement accounts. If 100% of your money is in retirement accounts, it may be preferred to build some non-retirement assets prior to retirement to give yourself the ability to control taxable income later should you have a large expenditure come up. This advantage probably outweighs the compounding growth aspect of the non-deductible IRA.
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Re: IRA Help

Postby livesoft » Sat Feb 09, 2013 11:52 am

Rammer wrote:Ok, I guess I didn't realize you could do this. If so, then why would one rather invest in taxable? Wouldn't a non-deductible IRA at least allow the earnings to grow tax free?

A taxable account invested tax-efficiently does allow gains to grow tax-free: Unrealized capital gains are NOT taxed. And when the capital gains are realized, one pays taxes on the gains at a lower rate than they would pay on gains withdrawn from a non-deductible IRA. There are many other advantages to a taxable account over a non-deductible IRA. The one advantage of a non-deductible IRA is that is can go practically immediately into a Roth IRA. If that advantage is eliminated, then it is not worthwhile.

And a non-deductible traditional IRA is not to be confused with a deductible traditional IRA nor with a Roth IRA.
And an after-tax contribution to a traditional 401(k) has the same characteristics as a non-deductible traditional IRA.

Also, I'm looking into my employer's plan and it doesn't explicitly say they allow Trad IRA transfers in. Is this typical?

I think it is typical that a 401(k) does not allow transfers in. None of the plans that my spouse or I have participated in allowed transfers in.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: IRA Help

Postby Default User BR » Sat Feb 09, 2013 1:13 pm

livesoft wrote:And an after-tax contribution to a traditional 401(k) has the same characteristics as a non-deductible traditional IRA.

Not if it allows in-service rollovers, as those can go straight to Roth IRA without triggering pro-rata.

livesoft wrote:I think it is typical that a 401(k) does not allow transfers in. None of the plans that my spouse or I have participated in allowed transfers in.

I'm not sure that "typical" is accurate. Many plans do allow incoming rollovers. Some restrict those to rollover IRAs, but I'm not sure how carefully they check the provenance of those. It's pretty easy to create a rollover IRA and fund it with a rollover from another IRA.


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Re: IRA Help

Postby JW Nearly Retired » Sat Feb 09, 2013 1:46 pm

livesoft wrote:
Rammer wrote:Ok, I guess I didn't realize you could do this. If so, then why would one rather invest in taxable? Wouldn't a non-deductible IRA at least allow the earnings to grow tax free?

A taxable account invested tax-efficiently does allow gains to grow tax-free: Unrealized capital gains are NOT taxed. And when the capital gains are realized, one pays taxes on the gains at a lower rate than they would pay on gains withdrawn from a non-deductible IRA. There are many other advantages to a taxable account over a non-deductible IRA. The one advantage of a non-deductible IRA is that is can go practically immediately into a Roth IRA. If that advantage is eliminated, then it is not worthwhile.

If you can't convert immediately to a Roth, it could still be worthwhile if you can see some years ahead when you will be in a low bracket and could do conversions then. Meanwhile, you keep piling up yearly non-deductible contributions getting ready for that.
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Re: IRA Help

Postby livesoft » Sat Feb 09, 2013 2:42 pm

JW Nearly Retired wrote:If you can't convert immediately to a Roth, it could still be worthwhile if you can see some years ahead when you will be in a low bracket and could do conversions then. Meanwhile, you keep piling up yearly non-deductible contributions getting ready for that.
JW

If you are in a low tax bracket, the taxable account may be even better because qualified dividends may go tax-free. My opinion is to just say NO! to a non-deductible IRA if it is not going to go into a Roth IRA almost immediately.

Full disclosure: I have an old traditional IRA to which I made non-deductible contributions. What a mistake!
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: IRA Help

Postby retiredjg » Sat Feb 09, 2013 2:58 pm

Rammer wrote:Where do you invest? Do you still put the $5500 in a Trad IRA without the deduction?

Opinions vary on this question. If you put stocks into the tIRA, the gains will eventually be taxed at a higher rate than if you put the money into a taxable account instead. So for stocks, the answer is "no, use taxable instead".

For bonds, an argument could be made that the earnings will be taxed the same if the money is placed in a taxable account or a tIRA. If you are in need of space to hold bonds, a tIRA may be a good solution. It will, however, interfere with back door contributions to Roth IRA in the future if you decide you want to do that.



Even though it grows tax free, does the principle essentially get taxed a second time upon withdraw?

No, it does not get taxed a second time. If you make non-deductible contributions to IRA, you keep a running record of that on Form 8606. When you get ready to withdraw the money, you pay tax on the part that has not yet been taxed. The only way you would pay twice is if you didn't keep up with your Form 8606.


Do you move forward with the backdoor roth and bite the bullet on the rollover?

No. This will pull all that money into the calculations for the tax on the conversion. Unless you are in a very low tax bracket, this is not advised. But as already mentioned, you might be able to move the money in the tIRA (the deductible contributions up to this point) to a 401k or 403b and get it out of the way. Then you could proceed with your back door contributions to Roth IRA.


Invest in taxable accounts only?

If the other ideas don't work for you, yes taxable account should be fine. This assumes that you are filling up your plan at work and any HSA account that you might have available.
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Re: IRA Help

Postby JW Nearly Retired » Sat Feb 09, 2013 3:51 pm

livesoft wrote:
JW Nearly Retired wrote:If you can't convert immediately to a Roth, it could still be worthwhile if you can see some years ahead when you will be in a low bracket and could do conversions then. Meanwhile, you keep piling up yearly non-deductible contributions getting ready for that.
JW

If you are in a low tax bracket, the taxable account may be even better because qualified dividends may go tax-free. My opinion is to just say NO! to a non-deductible IRA if it is not going to go into a Roth IRA almost immediately.

Full disclosure: I have an old traditional IRA to which I made non-deductible contributions. What a mistake!


Full disclosure: No Roth until now. I had an old traditional IRA to which I had never made any non-deductible contributions. Finally took my last chance to make 2012/2013 non-deductible contributions and Roth convert the whole account two weeks ago. The tax hit is nasty but better than the alternative. It was a must do before RMDs kick in.

What a mistake for me not to have made non-deductible contributions over the last several years. :)
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Re: IRA Help

Postby retiredjg » Sat Feb 09, 2013 4:05 pm

JW Nearly Retired wrote:
livesoft wrote:Full disclosure: I have an old traditional IRA to which I made non-deductible contributions. What a mistake!

What a mistake for me not to have made non-deductible contributions over the last several years. :) JW

Priceless.
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Re: IRA Help

Postby livesoft » Sat Feb 09, 2013 5:38 pm

JW Nearly Retired wrote:What a mistake for me not to have made non-deductible contributions over the last several years. :)
JW

And where did the money come from to pay the taxes on the conversion? I'll will guess the money came from your taxable account.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: IRA Help

Postby JW Nearly Retired » Sat Feb 09, 2013 7:44 pm

livesoft wrote:
JW Nearly Retired wrote: What a mistake for me not to have made non-deductible contributions over the last several years. :)
JW

And where did the money come from to pay the taxes on the conversion? I'll guess the money came from your taxable account.

Where else? From a low return EF account that was bigger than it needed to be. The new Roth is holding equities instead of the short term bonds the TIRA had.
We will probably hold it for heirs. AA readjusted back in 401k. The conversion tax rate was lower than the rate on RMDs will be when they (and age 70 SS) kick in next year. So what's not to like? I can even do the backdoor thing if I do a little consulting in future years.

Should say this is not a huge IRA. Didn't have many years when I could contribute and I've never done any 401k rollovers.

By the way....... I thought you had it all arranged so your tax rate is going to be low in early retirement. Why wouldn't you be doing this?
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Re: IRA Help

Postby livesoft » Sat Feb 09, 2013 8:29 pm

Tax rate is low in early retirment because of the taxable account not because of the IRAs. We have plenty of 401(k) and 403(b) assets that will be slowly converted to Roth IRA while living off the taxable account.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: IRA Help

Postby zebrafish » Sat Feb 09, 2013 10:03 pm

Default User BR wrote:Many plans do allow incoming rollovers. Some restrict those to rollover IRAs, but I'm not sure how carefully they check the provenance of those. It's pretty easy to create a rollover IRA and fund it with a rollover from another IRA.
Brian


My employer plan allowed roll-in of a rollover IRA but not a SEP-IRA. So I asked whether they cared where funds in a rollover IRA came from. The answer was that they really didn't check or have any way to check ("it has to be a rollover IRA"), so I rolled my SEP-IRA into an existing rollover IRA (but I could have simply created a rollover IRA account from scratch), then did a roll-in of my rollover. Sort of ridiculous, but it worked.

It then allowed me to do backdoor Roth contributions without paying any taxes on the backdoor conversion.
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Re: IRA Help

Postby JW Nearly Retired » Sun Feb 10, 2013 12:41 pm

livesoft wrote:Tax rate is low in early retirment because of the taxable account not because of the IRAs. We have plenty of 401(k) and 403(b) assets that will be slowly converted to Roth IRA while living off the taxable account.

I don't see the difference. That conversion works equally well on TIRA assets.
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Re: IRA Help

Postby livesoft » Sun Feb 10, 2013 12:44 pm

The 401(k) contributions were deductible for us. Traditional IRA contributions are not deductible for us. That's the big difference.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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