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 Post subject: When you can't contribute to a Roth IRA anymore...
PostPosted: Sat Apr 07, 2007 8:32 am 
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Come September, I get married, and our AGI will over the limit to contribution anything

You start looking around and wonder...what can you do?

So far, I've come up with the following options
1) Variable Annuities (umm, no. high fees)
2) ETF's (I dont know much about them, but could be good, low management fees as theyre index funds, basically), but high transactions costs if trading frequently
3) nondeductible ira (i think that means my earnings grow tax deferred but then get taxed when i cash out). I also dont think I can put them in mutual funds, but if I could, id just do more index funds.

i am meeting with a personal financial planner from the DOJ tuesday...any words o wisdom good until then.

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PostPosted: Sat Apr 07, 2007 8:36 am 
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Do a non-deductible traditional IRA and then convert it to Roth in 2010 when the conversion income limits go away. (It's a bit more complex than this, but that should get you started.)

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PostPosted: Sat Apr 07, 2007 9:15 am 
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A traditional IRA, even when you cannot deduct your contributions still gives you tax deferred growth (when you take it out, you only pay tax on growth if you’ve already paid tax on the contribution). And, you absolutely can hold mutual finds in an IRA.

I’m not a fan of annuities; however, there are some very low expense, no load annuities available, there is even a flat fee one I’m aware of. It is almost always cheaper to max your IRA first; you can’t deduct annuity contributions either.

I like ETFs, but you do have to consider the cost to purchase or sell them. So in smaller amounts, they may not be practical.

The financial planner should be able to help you construct a savings and investing plan that meets your needs.


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PostPosted: Sat Apr 07, 2007 9:22 am 
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On the ETFs, there are zero commission brokers like zecco.com or flat annual membership brokers (with no commissions) like FOLIOfn that may make buying ETFs a little more practical.


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PostPosted: Sat Apr 07, 2007 9:40 am 
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Neither am I a fan of annuities. Whenever someone in the financial business starts pimping something, I grow suspicious.

With a non-deductible IRA, am I able to point it to a vanguard or wilshire index fund? Initial capital outlay to get around any fees for low balance arent a problem.

I'm also figuring that it may make good sense to convert my roth into a traditional, seeing as I cant contribute to it any longer...

I'd probably consider buying ETFs after maximizing the IRA...

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PostPosted: Sat Apr 07, 2007 10:34 am 
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You can open an IRA account directly at Vanguard, but I think Vanguard charges $10/year for fund balances under $10,000, even in IRAs. If you’re under 50, the most you can put in this year is $4,000.

If you open an IRA at a discount brokerage, they might not have an annual fee but you may have to pay a transaction cost (even to buy no load funds). Some brokerages have a menu of “no-transaction-cost-funds,” but I’ve yet to see Vanguard on one of those menus. Be sure to check that the brokerage can hold the mutual funds you want to buy before you open an account. You can also hold ETFs in an IRA.

(Check out IRS Publication 590 available at http://www.irs.gov if you want to learn more about what an IRA can and cannot hold or anything else about individual retirement arrangements.)

I’m not sure why you’d want to convert Roth to traditional? There is nothing stopping you from having both. Why give up the potential for tax free growth on some of your assets if you don’t have to?


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PostPosted: Sat Apr 07, 2007 11:06 am 
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I'd like to point out that ETFs and IRAs are not mutually exclusive. An IRA (deductable, non-deductable, Roth) is just an account. An ETF is something in which the account can be invested. Within the account, you can hold ETFs, stocks, mutual funds, bonds, and any combination of those that you choose. There is no requirement to buy ETFs if you have an IRA, and ETFs can be purchased in a regular, non-retirement account. There is no special tax/retirement treatment afforded to ETFs. They're just one of many investment choices.

Also, just like a checking or savings account, there is nothing really stopping you from having as many IRAs as you'd like or can manage. Although the contribution limits depend on your age & income ($4000 for most people) you could put $1000 into 4 different accounts, $500 in to 8, and so on. There's no advantage that I know of to doing this, but it's possible (read: legal) to have multiple Roths as well as multiple Traditional IRAs.

But if we're voting on JH's retirement plan, I also vote for the non-deductable IRA (aka Traditional IRA, with no immediate tax benefit). The tax-deferred aspect of that is what makes it most appealing. I also vote to keep the Roth as a Roth, unless there's just a bare minimum of funds in it and it's more trouble to manage it separately.

Also note: If you have substantial assets (usually 10-50k) on deposit with the same firm in other accounts (regular brokerage, checking, savings), they may wave the 'account minimum' fees. I know this is the case at both E*Trade and TD Ameritrade.


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PostPosted: Sat Apr 07, 2007 12:31 pm 

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I disagree with the advice regarding contributing to a non-deductible IRA.

The cons of a non-deductible IRA:
1) You tie your money up for a long time.
2) You subject yourself to regular income tax rates when you withdraw the money.
3) Complex accounting to track your basis

The _only_ pro that I can think of
1) Tax deferral on earnings.

Keep in mind that in a taxable account your funds receive beneficial tax treatment (lower capital gains and dividend rates). By putting your money in a tax efficient fund, you can minimize any capital gains tax until you need the money.

By putting the money in a non-deductible IRA, those capital gains and dividends will be taxed at the full income tax rate.

miller posted about this topic: http://www.mypocketchange.com/2007/02/12/are-non-deductible-traditional-iras-worth-it/. From his analysis, it appears to me that there is virtually no benefit to the non-deductible IRA, but having your money tied up has big drawbacks.


My recommendation (and what my wife and I have done) is simply open a regular taxable account at Vanguard, and invest in index funds. It's a simple investment, the money is accessible without penalty if you need it (for example, if you decide to buy a house).

There have been numerous articles about contributing to a non-deductible IRA and rolling that over to a Roth in 2010. This is a great idea *IF IT WORKS*. The new congress has made substantial rumblings about closing this and other loopholes. So it's *quite possible*, maybe even likely, that you'll wind up stuck with $16k in a non-deductible IRA, with its terrible tax treatment, and no way to get at the money.



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PostPosted: Sat Apr 07, 2007 1:06 pm 

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1) Variable Annuities

VAs that are sold to you by salespeople have high fees. VAs you research and buy yourself may have low fees. For example, Vanguard and Fidelity both offer VAs for 0.25%. There's another company called Jefferson Mutual that charged a fixed 240/year and at >100K, the fees are lower than Vanguard/Fidelity. VAs do have the unfortunately side effect of turning long term cap gains and qualified dividends into taxable income. And because it's only tax-deferred versus a tax-free Roth (or tax-deductible IRA contributions), the tax treatment is not as beneficial. Now that's based on the current 15% LTCG/QDIV rate -- my guess is that future congresses/presidents will have to raise it back up to 20%-25%. So the calculations on what is better is a bit nebulous. A good strategy is to split your allocation up by account types -- investments you know will not benefit much from LTCG/QDIV like Bonds+REITS could be put into a Vanguard VA. Here's a rough split for somebody who likes index funds.

401K/IRA/Roth IRA/HSA : International, Small Cap Value, Large Cap Value
Taxable: Large Cap Growth, Small Cap Growth
Variable Annuity: Bonds, REITs

If you like managed funds, the CG turnover makes Small Cap Growth need the tax advantage status more than Large Cap Value.

2) ETFs

Whether ETFs are appropriate for taxable accounts or not totally depend on what the ETF is tracking. If you buy a bond ETF or a REIT ETF, guess what? It's going to issue just as much taxable dividends as the mutual fund it's based on. There is a slight advantage in that you do not take the stock turnover hit due to how ETFs are constructed. For example, a Vanguard ETF doesn't actually hold any companies. What you own for this ETF is the right to redeem it for regular Vanguard mutual fund shares. Hence the reason why it trades within a narrow range of the regular Vanguard share prices. If it ever traded at a discount, a trader could buy a huge number of shares and then request Vanguard to issue him regular fund shares. The fee for conversion from ETF to fund is 18K so it's not something you or I could do but a hedge fund could easily do this to capitalize on trading anamolies. (Vanguard offers conversion the other way for only $50.) On the otherhand, Vanguard index funds have so little turnover, this isn't a big deal. I own 7 different Vanguard funds and only 1 (REIT) had any capital gains distributions last year.

ETFs do have the advantage of lower fees. This can be wiped out by brokerage fees unless you have a low-cost broker. I just switched myself to Wells Fargo and I get 100 free trades a year (25k combined minimum balance) so buying ETFs has become a very good deal for me. Zecco also offers free trading -- 40 free trades a month for taxable accounts. IRA accounts, they charge $40 a year. Bank of America is the final deal I know of -- 30 free trades per month if you have 25K combined balance in savings/checking/CD accounts with them.

3) Non-deductible IRA

samerwriter has already mentioned the possibility of the 2010 Roth IRA conversion not being allowed. Without the Roth IRA conversion option, a non-deductible IRA acts just like a Variable Annuity without the M/E fee (although a low balance IRA fee is probably about the same .25%). Tax-deferred growth that converts LTCG/QDIV to income rate gains. So the same advice as above -- Bonds and REITS in a non-deductible for optimal tax treatment.


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PostPosted: Sat Apr 07, 2007 6:06 pm 
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thanks guys for the input.

my 403c (im a government bureaucrat, we dont have 401k, but same thing, is invested 50% in their 2040 target fund, 20% in their 2030 target fund, and 30% in International.
my roth points to a the Vanguard Small Cap and SP500. There's only 6K in there because I finished graduate school, about a year and a half ago

i normally would have 10-15k being added to my savings account every year, but thats for saving up for big purchases like a car or big vacation.

Basically, now that I cant contribute to the roth ( iguess I could pump 4k more in BEFORE i got married), i need to know what my seconary investment vehicle is.

my fiancee's 2nd investment vehicle is her janus fund. I helped her change the makeup so she's in their enterprise, research, and contrarian funds. Love that contrarian fund.
Whatever my investment vehicle, I want to point to an index fund, looking to add small cap exposure, and as well as contrarian to my portfolio.

With an ETF, I doubt I would be trading it...just buying shares once a year.

the variable annuity was mentioned to me by one of the wealth service managers at my new bank. We talked a good bit about alot of vehicles. He believes in managed funds, and I dont, so it was interesting.

since im believing in vanguard anyways, i think think that taxable account might be best...

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PostPosted: Sat Apr 07, 2007 7:19 pm 
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Be careful pumping more into your Roth before you get married... If you're getting married this year, then I think (?) you could run into trouble come tax time -- even if you made the contributions before you got married, the IRS will treat it as if you've been married the full year.

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PostPosted: Sat Apr 07, 2007 8:39 pm 
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Nickel is correct. Maybe you should postpone the wedding. :)

In response to samerwriter,
I can't argue the cons except to suggest that tying up retirement funds until you retire is a marginal con at best. For some people, not being able to get at the funds (without penalty, obviously) is exactly the kind of discipline needed to stick to a dedicated retirement savings plan. Miller's article hits all the pertinent arguments except for the tax bracket in retirement assumption: I don't think most people should assume that their tax bracket in retirement will be the same as it is currently. If you assume that the tax bracket in retirement is lower than the current bracket, it argues more favorably for deferring some of those taxes. And it's not just a matter of assuming a tax bracket, it's assuming that your bracket will be lower in retirement.

That said, I am in favor of a regular taxable account AFTER maxing out retirement contributions.


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PostPosted: Sun Apr 08, 2007 8:12 am 
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Yeah well, thanks for the info on the roth. I dont think she's gonna let me postpone the wedding =) And I kind of need a house and a sugarmama anyways , well that would be nice

looks like a non-deductible IRA, and any remainder going into a taxable vanguard account.

many thanks..ill be bringing all of this to my meeting on tuesday...ill let you know what advice the government gives

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PostPosted: Sun Apr 08, 2007 4:04 pm 

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I'm afraid this topic has been beaten to death, but I'll just give a final whack.

I'm not sure that additional savings in a non-deductible IRA should be considered retirement savings. It's pretty much the *least* advantageous "retirement" account possible, so it's likely that if one is funding a non-deductible traditional IRA, he's already maxed out other options (401k, 403b, etc..). If he's maxing out those accounts *and* contributing to a non-deductible IRA, I'd assume that early retirement is in the cards. And to retire early, he needs to have funds available with which to retire. Further, I wouldn't expect someone who is maxing these accounts out to need the discipline imposed by an early withdrawal penalty.

Regarding assumptions about tax bracket, in my opinion this is one of the best arguments *against* a non-deductible IRA. But first, assuming no changes in tax treatment then if one is in a lower income tax bracket at retirement, his capital gains rate will be lower as well. I haven't run the numbers, but I wouldn't expect miller's results to change appreciably. Unfortunately it is completely impossible to project tax rates 30-40 years out. http://www.truthandpolitics.org/top-rates.php illustrates this problem nicely. About the only thing we can say with certainty is that tax treatment will be different in the future than it is now.

Why do I think that's an argument against a non-deductible IRA? Because with a non-deductible IRA the account's future value is completely at the mercy of congress. The additional flexibility of a taxable account allows one to respond more rapidly to changes in the tax law. Personally, I believe it is very unlikely that there will be a substantial tax *cut* in the future. I believe it is very likely that there will be a substantial tax *hike* as our nation struggles with nearly $10 trillion in debt.

Of course this is all speculation. The best we can do for now is save and hope for the best.


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PostPosted: Mon Apr 09, 2007 2:00 pm 
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Like so many financial concepts, there is no one-size-fits-all solution, and this includes non-deductible contributions to an IRA. There are enough variables and unknowns that can make this solution right for one person and wrong for another. It should really be considered in light of someone’s entire situation, goals, and priorities.


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