IRA's for high earners-- what's the point?

[Downfall]

I am in a pretty good spot right now-- my budget is under control, my only debt is student loans, and my 401(k) is fully funded.

I am wondering what the best way to save the excess money is, which is admittedly a nice problem to have. My first instinct was to setup an IRA as a tax-preferred method of saving. However, I make too much to be eligible for a Roth IRA, and if I'm reading this chart correctly, I also can't take a deduction for contributing to a Traditional IRA because I'm covered by a retirement plan (the 401(k)) at work [I can't link to the IRS's chart because I have less than 15 posts, sadly].

If I can't get a deduction, an IRA seems like a fairly useless vehicle-- it adds strings to my money with no countervailing benefit. Am I missing something?

I suppose that leaves CD's-- low-yield right now-- or simply paying off my student loans early. The highest are at 6.8%, so that may be the best course. Has anybody here dealt with this problem before?

[reallyprettyhappy]

Hi, I'm in a similar spot and just found out that we can invest up to $5000 for 2009 and $5000 for 2010 each (my husband and myself) into traditional IRA's and then convert them to Roths after the fact, even though we are beyond the income limit for contributing to a Roth. Also, does your work use HSA/FSA for your med insurance? mine just changed to this type of plan and fully utilizing both of those is also going to go a long way in sheltering some of our income. Just some ideas for you to research. Unfortunately I don't have any details for you yet...I just broke down and hired a CPA to help me plan this all out, so after I meet with him again I'll have more specifics to share.

[Downfall]

Interesting, rph. So, you get the benefit on the backend when the withdrawal isn't taxed. I'll look into that. Please post back if you get more information!

[MonkeyMama]

Things to invest in higher tax brackets:

HSAs (If you have a HDHP health plan) - it's essentially a medical IRA, and if you never use it, it turns into retirement money. Though current investment choices are mostly terrible and expensive. They seem to get better with time. Arguably worth it for large tax savings.

529 Plans - College savings. No tax deduction for contributions, but money grows tax-deferred. No taxes when withdrawn for qualified education expenses.

Non-Deductible IRAs - there is the whole 2010 ROTH conversion thing, as mentioned. People also decide to contribute to IRAs, regardless of deduction, because the income is tax-deferred. Thus, no income to report or pay taxes on in ther interim - which makes for simple investing. If you don't get a deduction for the contribution, it is not taxed when you withdraw it. You would pay taxes on the income in withdrawal, which means you need to keep your "IRA contribution" records forever. Obviously, not the greatest option, but beats paying taxes on the income while you are in a high tax bracket, and does simplify taxes in the interim.

Self-employed - You would sock as much as possible in SEPs and solo profit sharing plans. You can shelter almost $50k per year.

That's about it. If gainfully employed - you have little other option. You could invest in tax-free bonds and the like.

I'd personally pay off the loans - may be the best "investment" at this point. Obviously you are not getting a tax break on the interest if you make so much.

[feh]

You can always open a taxable investment account. No tax advantage, obviously, but I'd sooner do that than put a bunch of money into CDs, assuming you're saving for the long run.

[creditcardfree]

I'm not a huge fan of annuities because of their high costs, but in high income tax brackets they can be a useful tool when all other options have been used. They allow your investment to grow tax free and their are no limits to the amount you can invest. But remember they are more costly than other investments! Do your homework, if you go this route.

[jIM_Ohio]

Originally Posted by Downfall

I am in a pretty good spot right now-- my budget is under control, my only debt is student loans, and my 401(k) is fully funded.

I am wondering what the best way to save the excess money is, which is admittedly a nice problem to have. My first instinct was to setup an IRA as a tax-preferred method of saving. However, I make too much to be eligible for a Roth IRA, and if I'm reading this chart correctly, I also can't take a deduction for contributing to a Traditional IRA because I'm covered by a retirement plan (the 401(k)) at work [I can't link to the IRS's chart because I have less than 15 posts, sadly].

If I can't get a deduction, an IRA seems like a fairly useless vehicle-- it adds strings to my money with no countervailing benefit. Am I missing something?

I suppose that leaves CD's-- low-yield right now-- or simply paying off my student loans early. The highest are at 6.8%, so that may be the best course. Has anybody here dealt with this problem before?

You don't give specific information, so I hope you don't expect a specific answer either?

That is said tongue in cheek... general questions get general responses and specific questions usually get specific answers.

"It depends".
Depends on how close you are to retirement (consider tax free growth on the investments).
Depends on state taxes
Depends on HDHP
Depends on what you would invest in
Depends on size of EF
Depends on how much debt you have.
Depends on tax brackets (federal) and eligible deductions.

Examples to consider-
if you are young and in a high tax bracket, do you own a house and get the mortgage interest deduction? Does that deduction change any of the above where I labeled "it depends"?

If you are close to retirement, how large is your cash cushion?

Do you think your tax bracket will drop anytime soon to consider converting the IRA into a Roth?

Very few of those situations depend on the same "condition" being true, so its possible the IRA makes sense if the conditions in your situation are correct.

I have a question which you hinted at, but is tangential to the IRA discussion....

why would you put a taxable investment into a CD because an IRA is not a good choice? If anything, I would be more likely to put stocks in a taxable account and a CD in an IRA based on current tax law...

Do not let the "wrapper" on the account choose what you invest in (an IRA is a wrapper, as is a 401k or similar tax shelter). The wrapper does not "govern" what the investment is.

Some of my depends "details"
Traditional (non deductable) IRA makes sense under some conditions (if any of below is true, IRA should be considered):

1) the money will be invested for a long time (20+ years, the tax free compounding of the IRA will usually win out over same investment in a taxable account).
2) the money might be converted to a Roth IRA at some point in future (this has inheritance implications and tax implications)
3) Owning the same security in a taxable account does not have same appeal
4) other tax advantaged accounts (like HSA) are maxed out

Taxable accounts make more sense in following conditions:
1) the need for liquidity trumps the need to shelter taxes
2) the need for withdrawing money trumps need to shelter taxes
2a) possible example- IRA can be withdrawn at age 59.5, and you want to access money at age 55 or some age less than 59.5
2b) possible example- you will be retiring in less than 10 years, and the tax free compounding won't make a big difference over such a short time period.
2c) possible example- you need to control retirement tax bracket to prevent RMD from putting you in a higher tax bracket (this is possible if you have a pension in addition to 401k)
3) The account and monies invested are not for retirement

[bigredmachine05]

I've been looking at equity indexed universal life insurance to shelter tax payments. Basically it works like a roth ira where you put after tax money in and then the money grows tax free and one withdraws the money tax free. Unfortunately, the fees are rather high and one needs to be real careful about causing a tax situation. I am still on the fence whether I want to do this. If anyone has suggestions, please let me know. I am in the same position as the original poster.

[b4freedom]

If you can, don't forget Supplemental Retirement Annuities (SRAs).

For example: TIAA-CREF - Supplemental Retirement Plans

[wincrasher]

I'd like to learn more about retirement saving for self employed persons.

I'm way over income limits for traditional IRAs.

I am a company of 1 person.

My income keeps growing and I've exhausted all my business deductions, so anything that would reduce tax liability would be great.

[zetta]

I'd like to learn more about retirement saving for self employed persons.

Look into the SEP-IRA, the Solo 401k, and the Solo 401k ROTH.

[TermMonster]

You're going to have to consider tax-efficient investments in a non qualified account. In other words, investments that offer tax advantages for "high income" earners. A couple general investment classes you should consider are: municipal bonds, non-traded REITS, Oil and Gas LPs, and other alternative investment classes.

As a high-income earner, you will need to subsidize your retirment accounts with after tax investment income and appreciation.