Should we contribute to a non-deductible IRA if we can't do a backdoor Roth?

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ianferrel
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Should we contribute to a non-deductible IRA if we can't do a backdoor Roth?

Post by ianferrel » Wed Feb 06, 2019 7:07 pm

Usually we just contribute directly to Roth IRAs, but this year we were over the income limit. I have no deductible IRAs, so I did a backdoor Roth.

My wife has some deductible IRAs, so in the past when we're over the Roth limit, we've done a non-deductible contribution with the expectation of doing a conversion in the future, but we've never actually done that conversion.

Is this a good idea? What should we consider in making the decision? We are planning/hoping to retire early, so we expect to have years in the not-too-distant future where we make significantly less income. So that could be a good time to do the conversion. On the other hand, we don't know exactly when that will be and we're locking the money up until then for little obvious gain at this point.

Silk McCue
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Re: Should we contribute to a non-deductible IRA if we can't do a backdoor Roth?

Post by Silk McCue » Wed Feb 06, 2019 7:14 pm

If you simply view her funds as retirement then you are doing something worthwhile. Being able to have the option to convert them to a Roth if you desire in the future is something I wouldn’t preclude.

Cheers

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samsoes
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Re: Should we contribute to a non-deductible IRA if we can't do a backdoor Roth?

Post by samsoes » Wed Feb 06, 2019 7:17 pm

If you contribute to a non-deductible IRA, you'll be married to form 8606 for life.

(Or, until the account attains a zero balance. Whichever comes first.)
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Alan S.
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Re: Should we contribute to a non-deductible IRA if we can't do a backdoor Roth?

Post by Alan S. » Wed Feb 06, 2019 7:20 pm

You should consider:
1) What is her dollar and percentage TIRA basis now?
2) If she is not working now, will that always be the case, or if she does work what are the chances of her working for a company with a qualified retirement plan that will accept IRA rollovers?

sailaway
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Re: Should we contribute to a non-deductible IRA if we can't do a backdoor Roth?

Post by sailaway » Wed Feb 06, 2019 7:23 pm

I'll piggy back here. In our case, we plan to transition from accumulation to spend down within the next 5 years. We would be able to convert the first year without earned income, depending on the actual date of departure, perhaps the last year with earned income.

Husband has a single year's worth of non deductible IRA with about 5 years of earnings. Wife has about $15k in rollover IRA.

I haven't posed the question myself because it looks like we are just under the wire for this year.

mhalley
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Re: Should we contribute to a non-deductible IRA if we can't do a backdoor Roth?

Post by mhalley » Wed Feb 06, 2019 8:01 pm

The tax difference between taxable and non deductable Ira aren’t big enough to justify the tax hassle imo.
https://www.thesimpledollar.com/nondedu ... ributions/

megabad
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Re: Should we contribute to a non-deductible IRA if we can't do a backdoor Roth?

Post by megabad » Wed Feb 06, 2019 8:24 pm

ianferrel wrote:
Wed Feb 06, 2019 7:07 pm
Usually we just contribute directly to Roth IRAs, but this year we were over the income limit. I have no deductible IRAs, so I did a backdoor Roth.

My wife has some deductible IRAs, so in the past when we're over the Roth limit, we've done a non-deductible contribution with the expectation of doing a conversion in the future, but we've never actually done that conversion.

Is this a good idea? What should we consider in making the decision? We are planning/hoping to retire early, so we expect to have years in the not-too-distant future where we make significantly less income. So that could be a good time to do the conversion. On the other hand, we don't know exactly when that will be and we're locking the money up until then for little obvious gain at this point.
In making this decision, you should consider:

1) Time until conversion (and gains during this period)
2) Time after conversion until withdrawal (and gains during this period)
3) Current and future income tax rates
4) Current and future LTCG/QDI tax rates
5) Tax complexity

If the time to your conversion is very short and your time until withdrawal is long, than non-deductible IRA contributions can make sense. This is why the backdoor roth is generally preferred to be accomplished via a very quick conversion. The longer you hold on to the non-deductible IRA without converting, generally the worse off you will be. For most folks in a normal situation, gains in a non-deductible IRA will ensure that you will pay more taxes when compared to a taxable account. If early retirement is a few years out or you can envision another near term conversion opportunity, I might consider it. Otherwise, why would you want the almost certain increase in tax bill?

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Epsilon Delta
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Re: Should we contribute to a non-deductible IRA if we can't do a backdoor Roth?

Post by Epsilon Delta » Thu Feb 07, 2019 3:31 am

samsoes wrote:
Wed Feb 06, 2019 7:17 pm
If you contribute to a non-deductible IRA, you'll be married to form 8606 for life.

(Or, until the account attains a zero balance. Whichever comes first.)
If death comes first your heirs are married to form 8606.

Personally I don't get this dread of form 8606. It's one of easiest tax form I've ever completed, perhaps second only to 1040-V.

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Epsilon Delta
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Re: Should we contribute to a non-deductible IRA if we can't do a backdoor Roth?

Post by Epsilon Delta » Thu Feb 07, 2019 3:36 am

You should also consider if you have enough tax sheltered space for bonds. There is a good case that a non-deductible IRA is better for bonds than taxable.

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ruralavalon
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Re: Should we contribute to a non-deductible IRA if we can't do a backdoor Roth?

Post by ruralavalon » Thu Feb 07, 2019 10:08 am

ianferrel wrote:
Wed Feb 06, 2019 7:07 pm
Usually we just contribute directly to Roth IRAs, but this year we were over the income limit. I have no deductible IRAs, so I did a backdoor Roth.

My wife has some deductible IRAs, so in the past when we're over the Roth limit, we've done a non-deductible contribution with the expectation of doing a conversion in the future, but we've never actually done that conversion.

Is this a good idea? What should we consider in making the decision? We are planning/hoping to retire early, so we expect to have years in the not-too-distant future where we make significantly less income. So that could be a good time to do the conversion. On the other hand, we don't know exactly when that will be and we're locking the money up until then for little obvious gain at this point.
Probably better to just contribute to a taxable account, and, invest in very tax-efficient stock index funds.
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