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Author: jrr7 Date: 11/15/01 6:24 PM Number: 32548
If you're not allowed to contribute to a Roth due to income level, you have to run the numbers to decide whether a taxable investment or a nondeductible traditional ira is better.

I did a little investigation on this. I was in the 36% bracket before retiring, and even with this level of extortion, I found that using a tax efficient S&P500 Index fund, like Vanguard VTGIX, without any tax sheltering, compares very favorably in tax adjusted returns to putting the same money into a nondeductable IRA.

This is because the lower tax rate for long term capital gains (max 20%), applies when shares are sold, while everything coming out of the IRA is taxed at marginal rates.

Of course, this would only be true with a very tax efficient fund like VTGIX; ie one with a low dividend and minimum distributions.

Also, if the average dividend of the S&P 500 goes up much, the scales will tip back to the nondeductable IRA.

Other advantages of this approach are that the money is not tied up in an IRA, and can be used in an early retirement without any 72t hoops to jump through, and there is no limit to the amount you can save each year for your retirement.

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