IRA w/o deduction - Why?

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Thorsbane
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Joined: Tue Dec 18, 2018 2:57 pm

IRA w/o deduction - Why?

Post by Thorsbane »

I'm having a hard time rationalizing one of the steps in the recommended approach to investing. If my household income exceeds the threshold to deduct IRA contributions, why would I even bother? What financial incentive is there to be taxed on the money I contribute and get taxed on the earnings in the account for a Traditional? Should I still contribute to the Roth IRA with it's lower allowed contributions? I'm a bit lost on this one.
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anon_investor
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Re: IRA w/o deduction - Why?

Post by anon_investor »

Are your allowed Roth IRA contributions lowered because you are subject to the income phaseouts?

Non-deductible TIRA contributions are worth it if you plan to do a backdoor Roth IRA, but that might not be worth it if you have a lot of TIRA money, which would subject you to the pro-rata rule. If you have $0 TIRA money, then the entire non-deductable TIRA contribution can be converted to Roth with 0 tax implications since the money is already technically after tax. However, if you have TIRA money, then pro-rata calculation is required and you will have additional tax implications.
BD w/ Kung-Fu Grip
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Re: IRA w/o deduction - Why?

Post by BD w/ Kung-Fu Grip »

Three reasons:
1. creditor protection
2. back-door Roth
3. If your intended investment plan for this money generates ordinary income anyway, deferring the tax can result in being taxed at a lower rate in the future.
Gill
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Re: IRA w/o deduction - Why?

Post by Gill »

It's called tax deferred earnings. I contributed to an IRA whenever I was able and never received a deduction and now, in retirement, it's well into seven figures and continues to earn significant income tax deferred. In other words, you continue to earn income on the amounts you would have paid in income tax if the income hadn't been deferred.

Roth IRA's were not available during most of my working years. Those are even better. Contribute the maximum and you will never pay tax on the earnings throughout your lifetime.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
MotoTrojan
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Re: IRA w/o deduction - Why?

Post by MotoTrojan »

Personally I would only contribute if I was going to convert to Roth (backdoor, no other tIRA assets). If not, I suppose it could provide value if you had an advanced trading plan that would benefit from the lack of tax drag.
HomeStretch
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Re: IRA w/o deduction - Why?

Post by HomeStretch »

It makes sense if one has fully maxed out tax deferred contribution space and can do a backdoor roth.
SGM
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Re: IRA w/o deduction - Why?

Post by SGM »

During most of my working years I was unable to deduct an traditional IRA. Over 40 years of working my traditional IRAs and my 401ks grew significantly. After 2010 when the law changed so that one could convert to Roth IRAs regardless of income, I looked into future conversions. We converted after retiring and before delayed SS and some pension income began. We currently have all of our tax deferred accounts now in Roth accounts. We have no RMDs ever. Our Roth accounts will likely grow over the next 20 years or more. We have a legacy motive and we have several income streams in retirement so it is good for our situation not to have RMDs.


If I didn't put money in non-deductible IRAs I would have invested the money in a taxable account. We would have had a dividend drag and increased income tax during the accumulation period from the taxable portfolio.
mhalley
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Re: IRA w/o deduction - Why?

Post by mhalley »

I think most would not recommend contributing to a non deductable Ira if you are not going to do backdoor roths. I think this is mostly due to the increased complexity of taxes on withdrawal after retirement.
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