Non-deductible traditional IRA

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femtoman
Posts: 26
Joined: Sun Feb 20, 2011 9:55 pm

Non-deductible traditional IRA

Post by femtoman » Mon Feb 27, 2012 12:14 am

Hi,

I decided to open a traditional IRA with the Vanguard REIT fund since my company's 401(k) doesn't have a strong REIT offering. I didn't do my research apparently and I get no tax advantage from that on my income taxes for the tax year 2011.

I read the page here:
http://www.bogleheads.org/wiki/Non-dedu ... tional_IRA

In particular I fall into the "it's complicated" part of this line:
"If you are not eligible for a Roth IRA, then the answer is somewhat complicated."

I was just wondering if anyone has more specific advice on whether I should keep contributing $5k annually to a REIT fund or if I should just do something like keep it in a taxable account of dividend funds.

Or maybe there is no good answer either way.

Some more info. in case it helps:
Age: 28
Tax bracket: 28%
State income tax: 9% (Oregon)
Emergency fund: >12 months
Debt: None
401(k) savings: About six figures
No house, no kids.

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damjam
Posts: 942
Joined: Thu Mar 25, 2010 7:46 am

Re: Non-deductible traditional IRA

Post by damjam » Mon Feb 27, 2012 12:20 am

If you don't have any other IRAs you could convert your nondeductible IRA to a ROTH IRA.
See the Backdoor ROTH page in the WIKI.

femtoman
Posts: 26
Joined: Sun Feb 20, 2011 9:55 pm

Re: Non-deductible traditional IRA

Post by femtoman » Mon Feb 27, 2012 1:30 am

OK, thanks. I was hoping to reduce my current taxable income with a traditional IRA but it looks like my assumption is wrong.

I don't have any other traditional IRAs so the backdoor Roth seems it might be a good choice, but it seems like a fairly large loophole. I don't get it. Why would opening a new Roth IRA be income restricted but not the conversion from traditional to Roth?

Default User BR
Posts: 7501
Joined: Mon Dec 17, 2007 7:32 pm

Re: Non-deductible traditional IRA

Post by Default User BR » Mon Feb 27, 2012 2:06 am

femtoman wrote:Why would opening a new Roth IRA be income restricted but not the conversion from traditional to Roth?
Most of the time that people are converting IRAs, they do have taxable money. It's a move to generate revenue now at the expense of the future government. That a few people game the system doesn't seem to be a big concern, in spite of some people's fret and worry.


Brian

femtoman
Posts: 26
Joined: Sun Feb 20, 2011 9:55 pm

Re: Non-deductible traditional IRA

Post by femtoman » Mon Feb 27, 2012 1:29 pm

One last question:
This is for a traditional IRA that I opened a couple weeks ago (in 2012) but I applied the contribution to 2011. TurboTax prepared a form 8606 (Nondeductable IRAs) based off this.

When I do the conversion from traditional to Roth this week, will that apply to the tax year 2011, or tax year 2012?

Thanks a lot! Appreciate the help.

Default User BR
Posts: 7501
Joined: Mon Dec 17, 2007 7:32 pm

Re: Non-deductible traditional IRA

Post by Default User BR » Mon Feb 27, 2012 1:48 pm

femtoman wrote:One last question:
This is for a traditional IRA that I opened a couple weeks ago (in 2012) but I applied the contribution to 2011. TurboTax prepared a form 8606 (Nondeductable IRAs) based off this.

When I do the conversion from traditional to Roth this week, will that apply to the tax year 2011, or tax year 2012?
2012.


Brian

YDNAL
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Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: Non-deductible traditional IRA

Post by YDNAL » Mon Feb 27, 2012 1:53 pm

femtoman wrote:I decided to open a traditional IRA with the Vanguard REIT fund since my company's 401(k) doesn't have a strong REIT offering. I didn't do my research apparently and I get no tax advantage from that on my income taxes for the tax year 2011.
If you have a plan at work (401K), then IRA deductibility is (at best) reduced or no deduction — based on your income. It is always advisable to do "the research."
http://www.irs.gov/publications/p590/index.html
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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