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Subject:  Re: nondeductible IRA - Useless? Date:  12/22/2004  3:55 PM
Author:  2old4bs Number:  43680 of 88544

To some degree, retirement planning is not only about how the tax laws affect us today, but how we think they might hit us in the future.

I couldn't agree with you more. But none of us actually knows what will happen in the future. That's why I now hold my retirement funds in 5 different account types:

1. 39% in a 401K (to be rolled into a fully taxable TIRA)
2. 9% in a non-deductible TIRA (partially taxable)
3. 20% in a variable annuity (partially taxable)
4. 22% in taxable accounts (taxable at cap-gain rate)
5. 1% in a Roth (non-taxable) which I anticipate I will use to move fully taxable TIRA funds into on an annual basis post-retirement.
6. 9% Savings bonds (taxable only when traded in or at maturity)

I anticipate that these accounts will provide me with the flexibility to be better able to control taxable income in any given year post-retirement.

Even over a 20-30 year period at a 8-10% rate of return, even a 20% tax rate on withdrawal would make the nondeductible IRA a worse deal unless you churn stocks almost annually and incur a cap gains tax almost every year.

I'd like to see your calculations on this. You said, I'd rather lock in a 15% tax rate now on some gains. You are right, the only way to 'lock-in' the 15% cap gains rate is to sell and pay the tax on the gains from time-to-time, because our legislators could change that 15% rate upward at an time in the future. If you wait and sell it all in one year (as one would be apt to do if the cap gain rate was about to go up), you would most likely be subject to the Alternative Minimum Tax in that year.

I did a simple scenario of 2 accounts both earning the equivalent return, one taxable and one tax-deferred. I used $100K invested in each, and tax rates of 15% in the taxable and 20% in the TIRA, with earnings at 8%/year. I assumed one taxable event at 10 years in the taxable account for the full earnings to that date, and a second taxable event at 20 years for the remainder of the earnings, to keep it simple. The taxable event in the TIRA occurred in year 20 for a tax bill of $73,219 with an account value of $466,096, leaving a balance of $392,877. The first tax bill in the taxable account is $14,985 paid in year 11. The second tax bill is $30,257 paid in year 20. The account value in year 20 is $401,615, leaving a balance of $371,358. So although the total tax bill is lower in the taxable account by about $28K, the compounded returns on the first tax bill amount of $14,985 over 10 years result in $21,500 more after-tax cash in the TIRA. I don't think my math is incorrect. I did it on a spreadsheet, but one could probably get a 'ballpark' figure using an online calculator. If your results are different I'd sure like to know if I'm definitely doing something wrong! :-0


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