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Subject:  Re: Options for Higher Earners? Date:  4/5/2001  5:44 PM
Author:  wisenlucky Number:  28931 of 88502


I'm looking at that situation myself after this year, which will be my last year (hopefully) to meet the maximum AGI limitations for a Roth IRA. The remaining options are 1) a regular IRA making an after tax contribution or 2) no IRA at all (which I've seen referred to here as a taxable account). Here's my take on the situation, and some of the experts out there can correct me if I'm wrong.

With a regular IRA using after tax contributions, you will not be taxed upon withdrawal of your contributions, but you will be taxed, at regular income tax rates, on the earnings in your portfolio as you withdraw them. However, the tax will be deferred until you withdraw the earnings so it can grow without the impact of a tax bite taking a chunk of the principle each time you turn something over in your portfolio.

With a taxable account, you will be taxed at capital gains rates whenever a taxable event occurs (sell shares, etc.) or regular tax rates in the case of dividends. You cannot defer the taxes except by deferring the taxable event if you have control over it.

You would have to assess your own situation to determine if your regular tax rates are going to be higher or lower than capital gains rates when you retire, and whether you are going to aggressively turn your portfolio over and create taxable events in the interim.

If your regular tax rate will be the same as or lower than capital gains rates when you retire (which I would see as a bad outcome of retirement planning), and if you want to turn your portfolio over aggressively, the IRA route still might make sense to you.

If, however, your retirement tax rate will be higher than capital gains rates or you plan a buy and hold philosophy, it might make sense to forgo the IRA. In any event, the annual IRA contribution is limited to $2,000 per year, and in your income bracket you will probably be investing more than that each year. That might mean that you do both!

Me personally, I'm going to forget about the nondeductible IRA.

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