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I'm being told now that I make too much money to deduct the contributions to my IRA for 1999. My question is this: If that is the case, why would anyone who makes over 40K opt for the traditional IRA instead of a Roth-IRA? The only advantage I saw to the traditional IRA was the contributions were tax deductible. If I no longer get that advantage, it seems obvious to convert to a Roth. Any suggestions?
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Yes, if you are eligible for a Roth, most think that is the best place for your annual $2K contribution. However, after you exceed the income limits for a Roth, you are still eligible to make the contribution to a conventional IRA. Because earnings in the account are protected from taxes even though the contribution itself is not deductible, it is still a tax advantaged investment, and for most is still better than taxable investments. Similarly you should max your 401K both pretax and aftertax contributions.

Only after these are maxed do taxable investments make sense for retirement planning--most of the time.
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Hi Pauleckler!

That's my exact situation. I think I am now out of the income range for the ROTH, so should I now put that money in a regular Roth, or invest it in a taxable account? What are the pros and cons?

Also, if I have to take out my 1999 contribution(I'm right on the edge of being ineligible and I won't know for sure until I do my taxes), how should I go about it?

-- iwannabeafool
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iwannabeafool wrote:
I am now out of the income range for the ROTH, so should I now put that money in a regular Roth, or invest it in a taxable account? What are the pros and cons?

I think you mean a regular IRA.

The benefit of a regular IRA, that you cannot deduct is limited to sheltering all gains until you withdraw the money during retirement (or other times under special rules). Then, as with any IRA, all distributions are taxed at ordinary income tax rates.

It is quite easy with a spreadsheet to show that this is a better investment than most plans due to the ability to reinvest all gains without paying yearly taxes. The one possible exception would be if you invested in stocks that appreciated without paying any dividends, and you never sold them until you retired )or needed income). Then your tax rate would be the long term capital gain rate, which is currently 20%. This approach might work, but I would worry about the stocks turning down and having to sell them early. This would ruin the shelter effect of the stocks.

rkm
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YOu have just learn something. YOu are correct. Invest in Roth in 2000.
Just wait til you get to 100k or more. Then you will really get your eyes opened.
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