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Author: stephenwo Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Options for Higher Earners? Date: 4/5/2001 5:18 PM
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So, suppose that you have an AGI of greater than 170,000. Is there any reason for you to care that IRAs exist? I gather that there is no IRA to which you can contribute once you get past 160,000.

True?
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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28930 of 75383
Subject: Re: Options for Higher Earners? Date: 4/5/2001 5:31 PM
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stephenwo: "So, suppose that you have an AGI of greater than 170,000. Is there any reason for you to care that IRAs exist? I gather that there is no IRA to which you can contribute once you get past 160,000.

True?"


False.

First, anyone with earned income (and spouses of those with earned income) can contribute to a non-deductible, traditional IRA up to the lesser of earned income or $2000. Earnings accrue tax-free until withdrawn.

Second, unless you will be one of the rare individuals who works for only one company his/her entire career, 401-k funds can be rolled over to a traditional IRA upon separation of service. An IRA often provides better choices and more control over expenses than many 401-k plans.

Regards, JAFO


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Author: wisenlucky One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28931 of 75383
Subject: Re: Options for Higher Earners? Date: 4/5/2001 5:44 PM
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stephenwo,

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.

WnL

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28940 of 75383
Subject: Re: Options for Higher Earners? Date: 4/5/2001 11:01 PM
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If I were in the situation where I couldn't deduct traditional IRA contributions nor contribute to a Roth IRA, I would still consider non-deductable contributions to a traditional IRA but would probably consider only tax-inefficient investments in it, such as bonds or a bond fund or a REIT. I would use a taxable account for investments that are somewhat tax efficient (e.g., individual stocks, or stock funds that tend to have low turnover) and use the taxable account for investments that would eventually be taxed at long-term capital gains rates.

I would hate to turn good long-term capital gains rates into ordinary income tax rates just by sheltering it in a non-deductable traditional IRA.

IMHO, of course.

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Author: carylanne Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28967 of 75383
Subject: Re: Options for Higher Earners? Date: 4/7/2001 10:30 PM
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My family's income was above the amount to qualify for the deductible IRA (not complaining there). Rather than mess with the non-deductible IRA for husband and wife, I put the $4k towards the mortgage principal each year. That treated the $4k as a proxy for a bond investment but rather than future income, we had reduced interest now and in the future on our mortgage. At the time we were almost exclusively invested in equities so this was my way to "invest" in something else that was expense reducing (as opposed to income producing) since it was after-tax anyway. Just a thought.

Also, because we were self-employed, we both qualified for Keogh plans which allowed 20 to 40 thousand dollars each year in contributions to "qualified" retirement plans. The most generous plan was a defined benefit plan, while the easiest to administer was a defined contribution plan. If you are self-employed with that kind of income, "get thee to a benefit plan administrator".

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