Non Deductible IRA?

[JinCO]

I read in Money magazine last week that you will be able to convert money invested in a traditional IRA to a Roth IRA. I am not able to invest in a Roth IRA do to income restrictions. Would it make sense for me to invest in a non-deductible IRA between now and 2010? I think I read that you can contribute $5K per year...so I assume that means my wife and I can each invest $5K this year and next year and then convert to a roth. Is that correct?

We are in the 33% tax bracket which I think is supposed to increase to 35% after the Bush tax cuts expire in 2010. We currently max both 401K accounts. If the money was not invested in the IRA, we would pay off student loan debt which ranges from 2.25% to 4.2%.

[MonkeyMama]

Yes, I would do it.

It is a better deal the younger you are (the longer your ROTH will grow tax free...)

The only real donwside I can see is you will only have $10k to invest (& it may be a while before you can contribute more, if you ever can). I have been recommending to a lot of my clients but they have been piling it in for maybe 3 years+ plus they have their spouse contributions, etc. Sheltering a mere $5k or $10k, in one account, is simply not quite as lucrative.

With all that in mind, paying off the student loan isn't terrible. & there is an immediate benefit.

If you asked 2 days ago I would have said to contribute for 2008 too. But that ship has sailed...

[JinCO]

I could have invested for 2008 until 2 days ago? Oops, that might have been a good thing to do. As it stands now, how much would we be able to invest? $5K x 2 years x 2 people = $20K? We are 32 so it would grow for a while. Debt reduction would be nice as well though. We have a lot of debt between student loans and the house.

[jIM_Ohio]

I would question any advice which has you pay 33% or 35% tax on anything.

That same tax rate in retirement will almost certainly be less.

Use the IRA to shield earnings/gains from taxes.
Convert when tax bracket is below 25% only, unless contributions are 1 year old or so (this might be a special case in that you would have little gains get taxed).

[MonkeyMama]

I would question any advice which has you pay 33% or 35% tax on anything.

That same tax rate in retirement will almost certainly be less.

Use the IRA to shield earnings/gains from taxes.
Convert when tax bracket is below 25% only, unless contributions are 1 year old or so (this might be a special case in that you would have little gains get taxed).

Your point is rather moot here. The income has already been taxed. He can contribute the money (in 2010) and convert it immediately with no further taxes.

He will pay just as much tax to do anything else with the money. But there is no where else he can tax shelter a chunk of change for just about eternity. Wise strategy for people who have been loading up their nondeductible IRAs for many years. In this climate, few will pay taxes on 2010 conversions anyway. It may be a better tax shelter than we envisioned a few years ago.

[MonkeyMama]

I could have invested for 2008 until 2 days ago? Oops, that might have been a good thing to do. As it stands now, how much would we be able to invest? $5K x 2 years x 2 people = $20K? We are 32 so it would grow for a while. Debt reduction would be nice as well though. We have a lot of debt between student loans and the house.

Yes, sorry to say. You have until April 15th of following year to contribute to any IRA for a particular year.

I can't say for sure which is the better route. But tax sheltering $20k (yes you are correct) at your age is a good deal.

If you expect your income to remain as high for a long time, I would do it. If not, pay off the loans. I think that sums it up.

You can literally deposit the $10k into each account some time in 2010 (before April 2010) and convert it immediately. There would be no further tax consequences.

I gather from your OP that you have no other money in IRAs. Having other IRAs changes things. Just my caveat to others reading and thinking of doing the same thing.

[noppenbd]

Since the 401ks are maxed, you will pay tax on this money no matter what, so I would make nondeductible contributions for you and your wife for 2009 and 2010 with one catch. If you currently have old IRA money that was deductible at the time you contributed it, you have to be careful. The IRS considers all IRAs to be one account, so any Roth conversion will consist of some deductible monies and some nondeductible monies on a pro-rata basis.

There is a way around this. If your 401k allows IRAs to be rolled back in, you can roll the deductible IRAs into your 401k first, then contribute for the nondeductible IRA.