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Author: sequin Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121438  
Subject: Non-Deductible IRA Question Date: 7/7/1999 5:50 PM
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I have an IRA question...

Here's the situation: my husband & I make too much money for the Roth IRA (tough problem to have ;-), and we're already maxing out our 401k's. We would like to start a couple of non-deductible IRA's. Of course I realize that our $2000 each per year contribution would be after tax.

My question concerns the withdrawals -- assuming we make the withdrawals after age 65 -- are the withdrawals taxed too? If so, it seems as if we're being double taxed. Is this a good investment option for us?

Thanks,
sequin
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Author: jocave One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17019 of 121438
Subject: Re: Non-Deductible IRA Question Date: 7/7/1999 6:11 PM
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<<<<<
My question concerns the withdrawals -- assuming we make the withdrawals after age 65 -- are the withdrawals taxed too? If so, it seems as if we're being double taxed. Is this a good investment option for us?
>>>>>

Withdrawls of earnings will be taxed as ordinary income. However, your contributions will give you basis in the account, such that your contributions will be returned to you tax-free. Thus no dollars are taxed both going in and coming out.

You gain tax-deferred compounding of your contributions by making these non-deductable contributions. The drawback is that you lose the loweer capital gains tax rate. Depending on your time frame and how you'll be investing this money, you may or may not want to make this trade-off. I would certainly run the numbers yourself to see.

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17034 of 121438
Subject: Re: Non-Deductible IRA Question Date: 7/7/1999 8:38 PM
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[[I have an IRA question...]]

Okey Dokey....

[[ Here's the situation: my husband & I make too much money for the Roth IRA
(tough problem to have ;-), and we're already maxing out our 401k's. We would
like to start a couple of non-deductible IRA's. Of course I realize that our $2000
each per year contribution would be after tax.]]

Right...but remember that the AGI limitations are different for the IRA deduction issues as opposed to the Roth contribution issues. So make sure that you are looking at the correct rates. I discuss this in much more detail in my post on this very issue in the Taxes FAQ area. You might want to check it out.

[[ My question concerns the withdrawals -- assuming we make the withdrawals
after age 65 -- are the withdrawals taxed too?]]

Nope...when you make non-deductible contributions to your IRA account, you will NOT pay taxes on those amounts when they are finally distributed to you. So you will NOT be "double taxed" on these funds. You have what is know as "basis" in your IRA accounts.

But, of course, you WILL owe tax on any of the earnings that these contributions generated.

And the problem is that you can NOT pick and chose what to remove when you are taking your distributions. You can NOT deem that your "first" distribution is all a return of your original contributions...and leave the balance in there to keep earning tax deferred. You will be required to strike a percentage of the total when you take your distributions.

Example: Over the years, you make $40k in non-deductible IRA contributions. On the date of your first distribution, your total IRA account balance amounts to $160k (you've made some VERY good investments). You decide to take $10k out in distributions (after you are age 59 1/2).

Your contributions represent 25% of your total IRA account ($160k divided by $40k). Therefore, any distribution that you take would be 25% return of your original non-deductible contributions (or basis), and 75% taxable. If your distribution is $10k, $2,500 would be non-taxable, and $7,500 would be subject to taxation. And you would have to strike new percentages each and every time you take an additional distribution, based upon your remaining basis in the IRA and the value of the IRA.

Hope this clears it up for you...
TMF Taxes
Roy

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Author: sequin Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17041 of 121438
Subject: Re: Non-Deductible IRA Question Date: 7/7/1999 10:15 PM
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[[ Here's the situation: my husband & I make too much money for the Roth IRA
(tough problem to have ;-), and we're already maxing out our 401k's. We would
like to start a couple of non-deductible IRA's. Of course I realize that our $2000
each per year contribution would be after tax.]]

Right...but remember that the AGI limitations are different for the IRA deduction issues as opposed to the Roth contribution issues. So make sure that you are looking at the correct rates. I discuss this in much more detail in my post on this very issue in the Taxes FAQ area. You might want to check it out.

Hope this clears it up for you...
TMF Taxes
Roy


Thanks for the explanation on the withdrawals and all the "basis" stuff. I'm now clear on that part.

I am confused, however, by your comment on the deductibility. If our AGI is too high for a Roth IRA (above $160k), then wouldn't that also mean it is too high for a regular IRA to be deductible? I just looked at the IRA Deductions Limitation FAQ -- do I understand correctly that the 1999 AGI limit is $61k for an IRA contribution to be deductible?

Thanks for your help.

sequin





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Author: peppermintpatty Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17042 of 121438
Subject: Re: Non-Deductible IRA Question Date: 7/7/1999 10:18 PM
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sequin - Before limiting your annual contribution in a non-deductible IRA to $2000/year, why not look into a good "Non-Qualified Tax Deferred Variable Annuity" as a vehicle to grow more retirement money? Check them out...

Regards, PP

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17071 of 121438
Subject: Re: Non-Deductible IRA Question Date: 7/8/1999 10:01 PM
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[[Thanks for the explanation on the withdrawals and all the "basis" stuff. I'm now
clear on that part.]]

Glad I could help...

[[ I am confused, however, by your comment on the deductibility. If our AGI is too
high for a Roth IRA (above $160k), then wouldn't that also mean it is too high
for a regular IRA to be deductible?]]

Yes...absolutely. I just wanted to make sure that you were looking at the CORRECT tables when making your determination. You would be surprised how many people look at the IRA deduction limitation ($61k for married people in 1999), and think that is the AGI limitation for Roth IRA contributions. I just wanted to make sure that you were not so mislead.

[[ I just looked at the IRA Deductions
Limitation FAQ -- do I understand correctly that the 1999 AGI limit is $61k for
an IRA contribution to be deductible?]]

Correct. The low end, for married-joint filers is $51k. The high end is $61k. And the phase out range is between the high and low.

Sorry if I caused you confusion. I just wanted to be safe and make sure that you were using the correct limitation amount for it's desired purpose.

TMF Taxes
Roy

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Author: sequin Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17171 of 121438
Subject: Re: Non-Deductible IRA Question Date: 7/11/1999 9:56 PM
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Roy, thanks for clearing up my IRA questions. Do you have any suggestions for a next step in minimizing our taxes? We want to save all we can for retirement, but it seems like our only good tax-deferred investment option is our 401k's, which are already "maxed" out.

sequin

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Author: artlv Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17187 of 121438
Subject: Re: Non-Deductible IRA Question Date: 7/12/1999 1:22 PM
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> Author: sequin
> Do you have any suggestions for a
> next step in minimizing our taxes?
> We want to save all we can for retirement,
> but it seems like our only good tax-deferred
> investment option is our 401k's,
> which are already "maxed" out.

One thing to consider--if you're still renting--is a home purchase, if the monthly payment is close to what you're currently spending on rent.

At least initially, the mortgage interest tax deduction can help lower the effective monthly payment. Plus, you'll (slowly) build equity (i.e. the payments are guaranteed to end eventually, unlike rent). If you're lucky and the home has appreciated in value when you're ready to sell, so much the better.

Later,

Art

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17261 of 121438
Subject: Re: Non-Deductible IRA Question Date: 7/13/1999 6:58 PM
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[[Do you have any suggestions for
a next step in minimizing our taxes? We want to save all we can for retirement,
but it seems like our only good tax-deferred investment option is our 401k's,
which are already "maxed" out. ]]

Nothing specifically. I have a number of posts in the Taxes FAQ area that may be useful. But without knowing anything about you and your financial situation, it's really just impossible to say. You might want to visit your local bookstore and browse the stacks. There are thousands of books out there that claim to lower your taxes with different techniques. Check 'em out. You might find thing(s) that appeal to you.

TMF Taxes
Roy

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