Unwise for High-Earner to Contribute to Traditional IRA?

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Random Poster
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Unwise for High-Earner to Contribute to Traditional IRA?

Post by Random Poster » Sat Feb 10, 2018 3:21 pm

I earn too much to contribute directly to a Roth IRA, don't want to do a backdoor Roth IRA, and earn too much to deduct anything from making a Traditional IRA contribution. I do max out my 401k though and contribute around $175k to $250k a year to a taxable account.

Given the foregoing, does it make any sense for someone in my situation to contribute to a Traditional IRA?

I get the whole "you only get the tax-deferred space once" argument, but I also see the downside of RMDs decades from now and having them taxed at potentially higher rates than long-term capital gains are. But would it make more sense for me--tax wise or otherwise---to forego the Traditional IRA and just invest the $5500 in a regular taxable account?

Thanks.

MotoTrojan
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by MotoTrojan » Sat Feb 10, 2018 3:28 pm

Why not backdoor? Non-deductible is a terrible option, in almost every case taxable is better, but nothing beats the Roth. Do you have deductible Ira assets preventing backdoor?

Having said that, with $1/4M a year into taxable, it really doesn’t matter what you do with $5500. Might as well buy bitcoin or put it on double zeros.

tibbitts
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by tibbitts » Sat Feb 10, 2018 3:30 pm

Random Poster wrote:
Sat Feb 10, 2018 3:21 pm
I earn too much to contribute directly to a Roth IRA, don't want to do a backdoor Roth IRA, and earn too much to deduct anything from making a Traditional IRA contribution. I do max out my 401k though and contribute around $175k to $250k a year to a taxable account.

Given the foregoing, does it make any sense for someone in my situation to contribute to a Traditional IRA?

I get the whole "you only get the tax-deferred space once" argument, but I also see the downside of RMDs decades from now and having them taxed at potentially higher rates than long-term capital gains are. But would it make more sense for me--tax wise or otherwise---to forego the Traditional IRA and just invest the $5500 in a regular taxable account?

Thanks.
Speaking as someone who contributed to a non-deductible traditional IRA during just a few good years... if you do that, just kill yourself now, so you can avoid the curse of a lifetime of 8606 filings. But first add me to your will, please.

What's the issue with the backdoor Roth? Other than the nagging controversy over them that I haven't kept up with but I think is still going on.
Last edited by tibbitts on Sat Feb 10, 2018 3:45 pm, edited 1 time in total.

TIAX
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by TIAX » Sat Feb 10, 2018 3:31 pm

Random Poster wrote:
Sat Feb 10, 2018 3:21 pm
I earn too much to contribute directly to a Roth IRA, don't want to do a backdoor Roth IRA,
That makes no sense. Backdoor Roths are now mainstream . See, for example, this article by Vanguard.
Last edited by TIAX on Sat Feb 10, 2018 3:43 pm, edited 1 time in total.

chevca
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by chevca » Sat Feb 10, 2018 3:36 pm

Why don't you want to do backdoor Roth? I'd do that for tax diversification, in your case.

I'd say you're probably better off with taxable otherwise. Assuming you would still be in a high tax bracket later on, and long term capital gains rates would be better.

Really though, it likely matters little for you. The $5500 limit is like pennies when you can save $175-250k a year in taxable. Go with some Traditional is you want to have different tax options someday. Or, don't... your taxable account will dwarf all your tax advantaged accounts, so it will matter little. My take on it anyway.

livesoft
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by livesoft » Sat Feb 10, 2018 3:41 pm

tibbitts wrote:
Sat Feb 10, 2018 3:30 pm
Speaking as someone who contributed to a non-deductible traditional IRA during just a few good years... if you do that, just kill yourself now, so you can avoid the curse of a lifetime of 8606 filings. But first add me to your will, please.
When we were younger we also contributed to non-deductible traditional IRAs, but we didn't have to file 8606 in the years we didn't do that, so it was somewhat less than a lifetime. I no longer have any traditional IRAs as all the money has been converted to a Roth IRA.

But I agree with the sentiment. If you are not going to convert a non-deductible traditional IRA into a Roth IRA in a timely fashion, then I think it is better to just invest tax-efficiently in a taxable account. For instance, the faux contribution could simply go into a tax-exempt muni bond fund.
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retiredjg
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by retiredjg » Sat Feb 10, 2018 3:44 pm

Conventional BH guidance (first book) was not to use a non-deductible IRA long term because the earnings just pile up and get taxed at a higher rate than if you had put the money into taxable. This assumed you were investing the money in stocks.

Your situation is different. First, if you are saving $250k a year, it isn't going to matter much where you save an additional $5,500 (or even $11,000). Second, you can clearly put bonds into tIRA so the earnings will not be taxed at a higher rate than if you put the money in taxable instead.

I would not worry about RMDs. First, your IRA will not get to be that large and second....much (most?) of it will be after tax money anyway. In early retirement, you may be able to live almost tax free from the taxable account and do Roth conversions at a fairly low rate.

Or somewhere mid-career, take a year off from your lucrative position and do Roth conversions while you are in a low income year.

Do not get involved in back door Roth unless you want to. Lots of people mess it up or find they have to fix something somewhere along the way. It can be a hassle. It's a nice option to have for those who want it, but do not be Roth-shamed into doing it.

Random Poster
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by Random Poster » Sat Feb 10, 2018 3:45 pm

MotoTrojan wrote:
Sat Feb 10, 2018 3:28 pm
Why not backdoor? Non-deductible is a terrible option, in almost every case taxable is better, but nothing beats the Roth. Do you have deductible Ira assets preventing backdoor?
I have an existing traditional IRA account that contains contributions from several previous years, a rollover IRA, and a Roth IRA account that contains contributions made from around 2000 to 2006 or so, and the paperwork to do the backdoor option seems too complex for me to handle at the moment.

chevca
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by chevca » Sat Feb 10, 2018 3:51 pm

Ah, that makes more sense if it's too complicated to want to do the backdoor Roth. It came across like, meh, just uninterested...

I'd stick with taxable, knowing more about the situation now.

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JoMoney
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by JoMoney » Sat Feb 10, 2018 3:53 pm

tibbitts wrote:
Sat Feb 10, 2018 3:30 pm
...
Speaking as someone who contributed to a non-deductible traditional IRA during just a few good years... if you do that, just kill yourself now, so you can avoid the curse of a lifetime of 8606 filings. ...
Wow :shock: :shock: :shock:
Why the harshness on keeping track of your after-tax basis in an IRA? It's not a complicated form, it's a pretty easy number to track once a year.
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livesoft
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by livesoft » Sat Feb 10, 2018 3:59 pm

Random Poster wrote:
Sat Feb 10, 2018 3:45 pm
MotoTrojan wrote:
Sat Feb 10, 2018 3:28 pm
Why not backdoor? Non-deductible is a terrible option, in almost every case taxable is better, but nothing beats the Roth. Do you have deductible Ira assets preventing backdoor?
I have an existing traditional IRA account that contains contributions from several previous years, a rollover IRA, and a Roth IRA account that contains contributions made from around 2000 to 2006 or so, and the paperwork to do the backdoor option seems too complex for me to handle at the moment.
I am doing that paperwork for my spouse now that I am done with the same thing for myself. I love complexity, but this stuff is really pretty simple. Once you've done one, you've done them all.
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Random Poster
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by Random Poster » Sat Feb 10, 2018 4:50 pm

Thanks to all who have responded.

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TomatoTomahto
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by TomatoTomahto » Sat Feb 10, 2018 4:57 pm

Random Poster wrote:
Sat Feb 10, 2018 4:50 pm
Thanks to all who have responded.
Yup, similar taxable situation to yours, and my tIRA gets in the way of a rIRA. My wife, though, has been backdooring $5.5 (or $6.5), and it eventually adds up.

JBTX
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by JBTX » Sat Feb 10, 2018 5:15 pm

retiredjg wrote:
Sat Feb 10, 2018 3:44 pm
Conventional BH guidance (first book) was not to use a non-deductible IRA long term because the earnings just pile up and get taxed at a higher rate than if you had put the money into taxable. This assumed you were investing the money in stocks.

Your situation is different. First, if you are saving $250k a year, it isn't going to matter much where you save an additional $5,500 (or even $11,000). Second, you can clearly put bonds into tIRA so the earnings will not be taxed at a higher rate than if you put the money in taxable instead.

I would not worry about RMDs. First, your IRA will not get to be that large and second....much (most?) of it will be after tax money anyway. In early retirement, you may be able to live almost tax free from the taxable account and do Roth conversions at a fairly low rate.

Or somewhere mid-career, take a year off from your lucrative position and do Roth conversions while you are in a low income year.

Do not get involved in back door Roth unless you want to. Lots of people mess it up or find they have to fix something somewhere along the way. It can be a hassle. It's a nice option to have for those who want it, but do not be Roth-shamed into doing it.
This is interesting. A non deductible IRA could be useful for somebody with a lot of savings to park their bond allocation. I never thought of that.

retiredjg
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by retiredjg » Sat Feb 10, 2018 6:31 pm

JBTX wrote:
Sat Feb 10, 2018 5:15 pm
This is interesting. A non deductible IRA could be useful for somebody with a lot of savings to park their bond allocation. I never thought of that.
Yes. If you need space for bonds, non-deductible contributions to tIRA are as good a place as any and better than taxable or Roth IRA in my opinion. Stocks are a different story. I would rather have stocks in taxable than IRA non-deductible contributions unless it would only be a few years before I could convert the IRA to Roth IRA.

itstoomuch
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by itstoomuch » Sat Feb 10, 2018 7:06 pm

Random Poster wrote:
Sat Feb 10, 2018 3:21 pm
I earn too much to contribute directly to a Roth IRA, don't want to do a backdoor Roth IRA, and earn too much to deduct anything from making a Traditional IRA contribution. I do max out my 401k though and contribute around $175k to $250k a year to a taxable account.

Given the foregoing, does it make any sense for someone in my situation to contribute to a Traditional IRA?

I get the whole "you only get the tax-deferred space once" argument, but I also see the downside of RMDs decades from now and having them taxed at potentially higher rates than long-term capital gains are. But would it make more sense for me--tax wise or otherwise---to forego the Traditional IRA and just invest the $5500 in a regular taxable account?

Thanks.
You have so much to set-aside that you can do whatever method suits your desires.
And what you chose today for retirement purposes is based on today's tax code, not on tomorrow's tax code. Things change.
Is Retirement savings the only objective? or can there other objectives as college education, house, multiple homes, charity, etc.
I'd look into alternatives: RE, annuities within IRA. Your private banker, CPA, attorney, will have resources and sources :twisted: :oops:
But what are your objectives? #1, #2, #3?.
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House Blend
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by House Blend » Sun Feb 11, 2018 12:09 pm

retiredjg wrote:
Sat Feb 10, 2018 6:31 pm
JBTX wrote:
Sat Feb 10, 2018 5:15 pm
This is interesting. A non deductible IRA could be useful for somebody with a lot of savings to park their bond allocation. I never thought of that.
Yes. If you need space for bonds, non-deductible contributions to tIRA are as good a place as any and better than taxable or Roth IRA in my opinion.
Yes and no.

A non-deductible IRA is always worse than a Roth IRA, even for bonds.

To the OP: if it is onerous paperwork that is stopping you from setting up a backdoor Roth, making non-deductible IRA contributions is not likely going to make you any happier. Except maybe in the short term. You'll have to document proration of the basis everytime you distribute money from any of your trad IRAs, until they are zeroed out.

tibbitts
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by tibbitts » Sun Feb 11, 2018 12:22 pm

JoMoney wrote:
Sat Feb 10, 2018 3:53 pm
tibbitts wrote:
Sat Feb 10, 2018 3:30 pm
...
Speaking as someone who contributed to a non-deductible traditional IRA during just a few good years... if you do that, just kill yourself now, so you can avoid the curse of a lifetime of 8606 filings. ...
Wow :shock: :shock: :shock:
Why the harshness on keeping track of your after-tax basis in an IRA? It's not a complicated form, it's a pretty easy number to track once a year.
I keep telling myself that every time I've filed those 1040Xs entirely due to 8606 mistakes. Last time I completely left out one of my (many) traditional IRAs balances. And then there's the horrible guidance the IRS provides. "At least three" digits after the decimal point? When you're dealing with seven figures, how many digits you (or your tax software, which changes from year to year, and which you have no control over) choose matters, and can result in your income and tax being entirely different. Just require 5 digits. Not three, not four, not six. Nobody is doing this using slide rules any more; it's no more more difficult using five digits.

Right now I'm waiting to file my 2018 taxes (and therefore waiting on my refund) until my most recent 2017 1040X confirmation shows up. And then I get the file the corresponding state return. Hopefully I won't own a late penalty on the $10. I'd almost made it an entire year without writing a physical check... oh well, there's always next year.

retiredjg
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by retiredjg » Sun Feb 11, 2018 4:59 pm

House Blend wrote:
Sun Feb 11, 2018 12:09 pm
Yes and no.

A non-deductible IRA is always worse than a Roth IRA, even for bonds.
Agree with what you said. I was unclear. I'll try again.

If I already have both IRA and Roth IRA, I'd rather have my bonds in the IRA than the Roth IRA. If I have to make tIRA or Roth IRA space, the Roth IRA space is definitely better as you said.

But this person is not interested in making more Roth space. To me, tIRA even with non-deductible contributions makes a lot of sense since it can be used as bond space.

Hope that was better. :happy

jvini
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by jvini » Sun Feb 11, 2018 5:17 pm

Does your work allow after tax 401k contributions with in service roll overs? This is ideal. The max is around 53,500k total pre and post tax combined, 60,500 for over 50. You can roll over your after tax contributions
yearly or more, into A ROTH IRA. It's a mega backdoor ROTH, and it's amazing if your work allows it.

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Earl Lemongrab
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Re: Unwise for High-Earner to Contribute to Traditional IRA?

Post by Earl Lemongrab » Sun Feb 11, 2018 6:14 pm

To remove the concern about capital gains turning to ordinary income, use the TIRA to hold bonds. Those dividends will be largely ordinary anyway, this way they're deferred. That makes it work similarly to savings bonds. No deduction, tax deferral on gains.
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