Non-deductible tIRA

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whattodonow
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Joined: Wed Jul 13, 2016 11:58 am

Non-deductible tIRA

Post by whattodonow »

I max out 401k, and make too much for deductible IRA contributions.
So I have a few questions on non-deductible tIRAs.

I just contributed at the beginning of this year to a IRA through Vanguard, putting $5500 for this year and last year, each. These were non-deductible per my situation noted above. As I have many years left before I'll need this, should I go ahead and do the back door (even though I should have done this immediately)? Further, I have a rollover IRA from a previous employer 401k which I have not contributed to since it was rolled over. Would I have to figure this into the backdoor Roth?

I keep reading mixed recommendations on REITs and non-deductible IRAs. Boglehead wiki says to put REITs in the non-deducitble IRA but, for example, Schawb website says to put them in tax advantaged accounts. Can someone break this down for me in laymen terms?

Thank you
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CAsage
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Re: Non-deductible tIRA

Post by CAsage »

Two separate issues:
1) Many people not eligible for a Roth do exactly what you are proposing, and do a 'backdoor' Roth conversion as soon as it is funded (or thereabouts). Warning: the IRS does count ALL your IRA balances when they calculate the taxable basis of this transaction, and it is strictly prorated. So... the downside is that your old 401k which is now an IRA would mean you have to pay taxes on that money when it comes out - making this much less desirable. And messy. If you had rolled that old 401k into your new 401k, then this would not be a problem.... Alternatively, if you can afford it (i.e. have the cash to pay the taxes, not get bumped into a higher tax bracket), convert all your IRAs and do the backdoor Roth from now on.

2) I love my REIT fund, but they throw off a lot of dividends, so having that in a tax-advantaged account (either a Roth, or an IRA) is a good idea. Schwab and Wiki kind of saying the same thing here.
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Topic Author
whattodonow
Posts: 59
Joined: Wed Jul 13, 2016 11:58 am

Re: Non-deductible tIRA

Post by whattodonow »

CAsage wrote:Two separate issues:
2) I love my REIT fund, but they throw off a lot of dividends, so having that in a tax-advantaged account (either a Roth, or an IRA) is a good idea. Schwab and Wiki kind of saying the same thing here.
The Wiki states "Tax inefficient investments such as REIT and bond funds are well suited to a non-deductible traditional IRA."

Schwab states "Tax-advantaged accounts such as Roth IRAs and tax-deferred accounts including traditional IRAs, 401(k)s and deferred annuities.
Ideal for...
Individual stocks you plan to hold more than one year
Individual stocks you plan to hold one year or less
Tax-managed stock funds, index funds, exchange-traded funds (ETFs), low-turnover stock funds
Actively managed funds that may generate significant short-term capital gains
Stocks or mutual funds that pay qualified dividends
Taxable bond funds, zero-coupon bonds, inflation-protected bonds or high-yield bond funds
Municipal bonds, I Bonds (savings bonds)
Real estate investment trusts (REITs)"

Isn't this saying exactly the opposite?
miles monroe
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Re: Non-deductible tIRA

Post by miles monroe »

i have a TIRA and if i could do it all over again i would have just put the money in my regular after tax account which is invested in index funds. paying taxes as you go is no big deal as index funds do not throw off large distributions.
livesoft
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Re: Non-deductible tIRA

Post by livesoft »

whattodonow wrote:Isn't this saying exactly the opposite?
No, it is not. It is saying the same thing.

I will summarize:

Schwab says that tax-advantaged accounts are ideal for all investments including REITs.

Wiki says that tax-advantaged accounts are ideal for REITs, but does not say they not ideal for everything else. You seem to have made up the underlined bit yourself.

I have a non-deductible tIRA that I started before there were Roth IRAs. Nowadays, I don't think anyone should contribute to a non-deductible tIRA UNLESS those contributions get converted rather soon to a Roth IRA.
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TomatoTomahto
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Re: Non-deductible tIRA

Post by TomatoTomahto »

OP, does your current employer accept tIRAs from outside (it's not unusual, IME most do)? If so, roll your rollover IRA into your 401k.

Was your rollover IRA in existence before this year? Someone more expert will chime in on possible tax consequences.

In general, backdoor Roth are not a great idea if you have existing tIRA balances. Don't forget to file form 8606.
I get the FI part but not the RE part of FIRE.
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retiredjg
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Re: Non-deductible tIRA

Post by retiredjg »

whattodonow wrote:The Wiki states "Tax inefficient investments such as REIT and bond funds are well suited to a non-deductible traditional IRA."
That statement is correct, but that does not exclude other tax-advantaged accounts such as Roth IRA, etc.

It should say "well suited for tax-advantaged accounts such as tIRA (deductible or not), Roth IRA, 401k/403b/etc." (Although the truth of the matter - low cost REIT is rarely available in 401k/403b/etc.)

Regarding the back door, you should not do it with your other IRA (although your IRA does not affect your spouse). You may be able to move your other IRA into your 401k.

The back door is easy to do but can be difficult to figure out the paperwork. Many people mess it up and then have to fix it. It can be a mess. My suggestion to you is to figure out the paperwork first (Form 8606), then consider doing the back door. Don't depend on your tax-preparer to know how to do it because many don't.
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