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If you don't qualify for a Roth IRA, is there a good reason to use a non-deductible traditional IRA over a taxable investment account? I know the earnings are tax-defered in the IRA but you have to pay income tax at withdrawl versus capital gains with the investment account. Would there be any protections (bankruptcy, lawsuits) for assets in the traditional IRA over the taxable investment account?

Would the answer to the above question change if Bush's proposed LSA and RSA accounts get passed by Congress? Future contributions would go into these proposed accounts. Would current non-deductible traditional IRAs be rolled into the RSA?

IF
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>>>If you don't qualify for a Roth IRA, is there a good reason to use a non-deductible traditional IRA over a taxable investment account? I know the earnings are tax-defered in the IRA but you have to pay income tax at withdrawl versus capital gains with the investment account. Would there be any protections (bankruptcy, lawsuits) for assets in the traditional IRA over the taxable investment account?

Would the answer to the above question change if Bush's proposed LSA and RSA accounts get passed by Congress? Future contributions would go into these proposed accounts. Would current non-deductible traditional IRAs be rolled into the RSA?<<<

In my unprofessional opinion, these boards overemphasize the value of tax-deferred retirement accounts. Unless you expect to drop one or two tax brackets upon retirement you may well do better tax-wise with long term capital gains and qualified dividends.

Doug
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If you don't qualify for a Roth IRA, is there a good reason to use a non-deductible traditional IRA over a taxable investment account?

Well, I am a fan of tax deferral (pre-tax contributions to a 401(k), 403(b), or even deductible contributions to a Traditional IRA), and of tax free (Roth IRA).

I am not really a fan of a non-deductible contribution to a Traditional IRA. However, if one has tax-inefficient investments for one's asset allocation plan, e.g., bonds, REITs, or managed funds with lots of turnover and thus lots of taxable distributions, sheltering them in a Traditional IRA may make excellent sense.

However, if one has only tax-efficient investments (e.g., a large cap index fund or a tax-managed fund), it may be better to just hold those investments in a regular (taxable) account.

Exception: if your state provides IRAs with protection from creditors and your occupation tends to attract lawsuits, non-deductible contributions to a Traditional IRA may make excellent sense, even if your investments happen to be tax efficient. Note, however, IRA protection from creditors varies between states.
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>>If you don't qualify for a Roth IRA, is there a good reason to use a non-deductible traditional IRA

Generally only if you can convert it to a Roth in a future year when your income's low enough (under $100K) to qualify.

>>Would there be any protections (bankruptcy, lawsuits) for assets in the traditional IRA over the taxable investment account?

I'm not a lawyer, and it depends on your state, but as I recall 401ks and other employer sponsored plans usually have greater protection than IRAs from creditors.


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In my unprofessional opinion, these boards overemphasize the value of tax-deferred retirement accounts

Here's my analysis of a tax deferred account vs a best case scenario taxable account, keeping tax brackets static.

http://boards.fool.com/Message.asp?mid=19920472&sort=whole#19922313

In reality, it's almost impossible to achieve the best case scenario taxable account. You wind up with dividends and net cap gains here and there.

Math aside, I love IRAs. I can sell a stock that's just doubled and is now (I think) overvalued, invest in bonds, dividend paying stocks and REITs without worrying about the tax consequences, etc. Especially in California, where the cap gains tax is second highest in the nation.

Nick
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In general I think an IRA still makes a lot of sense but changes in tax laws do make a difference. Use it for investments which generate interest and non-qualified dividends and for short-term equity trading. Your long-term capital gains and qualified dividends are better kept in a taxable account.

You also need to look at state tax laws. Illinois does not tax IRA distributions so that's a nice bonus.

Also remember that tax laws change constantly. No one knows what the next 10 - 20 years will bring. Diversification in types of retirement accounts may prove as important as diversification in asset classes.
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Here's my analysis of a tax deferred account vs a best case scenario taxable account, keeping tax brackets static.

Your analysis was faulty in this situation. You can't compare a 401k to a non-deductible IRA. In your analysis, you decided to handicap the taxable account right away by 25% which is not the case here.

IF
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Also remember that tax laws change constantly. No one knows what the next 10 - 20 years will bring. Diversification in types of retirement accounts may prove as important as diversification in asset classes.

That is true and one of the purposes of my question. The proposed LSA and RSA accounts do not have income limitations. If they come into effect this year (I hear not likely) or next year, I will be able to use those accounts. I will be left with a small non-deductible IRA that will get no further contributions. I have not been paying close enough attention to remember if I could roll this into those potential new accounts.

I also think it is good to have some accounts that don't have restrictions for removing money like IRAs.

IF

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Your analysis was faulty in this situation. You can't compare a 401k to a non-deductible IRA. In your analysis, you decided to handicap the taxable account right away by 25% which is not the case here.

Of course it is. Money going into a taxable account is taxed initially.

Nick
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Of course it is. Money going into a taxable account is taxed initially.

So is the money going to the IRA.

IF

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If you look at my post, you'll see I was responding to Doug's note about IRAs vs taxable accounts. I wasn't responding to your initial post.
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If you look at my post, you'll see I was responding to Doug's note about IRAs vs taxable accounts. I wasn't responding to your initial post.

You are???

When I read your reply, it was linked to my post and a portion of my post was cut and pasted into your reply.

IF
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Read it again. Msg# 39089. I posted two messages.
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I also think it is good to have some accounts that don't have restrictions for removing money like IRAs.

I strongly agree with this, particularly for individuals who have maximized whatever other retirement options are available. If life works out well, it might be nice to have the trip of a lifetime, buy a vacation home or give a gift when you you're 49.

rad
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If you don't qualify for a Roth IRA, is there a good reason to use a non-deductible traditional IRA over a taxable investment account? I know the earnings are tax-defered in the IRA but you have to pay income tax at withdrawl versus capital gains with the investment account?

Welcome to the (wish I could have a Roth) club! There are a few questions you have to answer: How long will your incremental tax rate be much higher than the capital gain tax rate? Also, what will your incremental tax rate be during retirement? If your incremental tax rate will be much lower during retirement, then a non-deductible contribution to an IRA might be the way to go, particularly if you have some time to go before retirement (> 15 years). If your rates might be similar both pre and post retirement, or even higher during retirement then a taxable account would be the way to go. Over the next few years you will benefit from the lower cap gains rate, but in order to do so you must be disciplined and use a "long term buy and hold" strategy.

As another posted pointed out, your portfolio allocation has to also be taken into account, as a tax-deferred account is a good place to hold REITs and other investments that throw off income NOT subject to the new low cap-gains rates.

2old
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Nick,

I agree with you on holding bonds, REITs, etc. in tax deferred accounts. However, the initial question,

If you don't qualify for a Roth IRA, is there a good reason to use a non-deductible traditional IRA over a taxable investment account?

is about NON-deductible IRA contributions, which does away with some of the advantages of an IRA because you are paying with 'after-tax' dollars. This would then leave the only advantage of the IRA option to defer taxes on ordinary income, which only makes sense if you intend to be in a lower tax bracket during retirement.

2old
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