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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75525  
Subject: Re: Non-Deductible IRA Strategy Date: 2/26/2001 1:53 PM
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YieldSigns asks,

My wife and I cannot deduct IRA contributions, for reasons relating to our combined income and my 401(k) contribution. I still want the power of compounded, tax-deferred returns. I have read IRS PUB 590 and I have a call into the IRS, but I wanted to pose broader questions to this board.

(1) Preliminarily, can I make NON-DEDUCTIBLE IRA contributions for both of us for the last calendar year (2000) and this calendar year still (2001)? (This would be a total of $8,000).

(2) If I can, is this the best strategy for capturing tax-deferred returns, or is there a better way.


If you are not eligible for a deductible IRA, the best way to capture tax-deferred growth is probably in a tax-managed index fund held in a taxable account. Everything you withdraw from an IRA is taxed as ordinary income (max rate=39.6). Most of the earnings from a long-term buy and hold investment in an index fund is taxed as capital gains (max rate=20%.)

(3) Finally, what happens if I want to withdraw the NON-DEDUCTIBLE IRA contribution at some point before the minimum retirement age? Assume none of the qualified exceptions for penalty-free withdrawals applies.) I know the $8,000 is not subject to taxation again, but is the withdrawal of the NON-DEDUCTIBLE $8,000 subject to the 10% penalty?


Yes, unlike a Roth IRA where you may withdraw your tax-paid contributions without penalty, any withdrawal from a traditional IRA is subject to the 10% penalty unless one of the exceptions (age 59.5, substantially equal periodic payments, disability, etc.) applies.

intercst
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