"FranksPlace2" <franksplace2[at]email.com> wrote in message
news:d6bbed5b.0404190853.4d1eac2a[at]posting.google.com...
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I'd call a single form once a year that's easy to fill out trivial.

franksplace2[at]email.com (FranksPlace2) writes:
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Actually, you track a sum. Once per year, you add two numbers.

The "fraction" calculation is only done when you take a distribution.
And you don't "track" the fraction - you use the fraction when you
figure out how much of a given distribuion is taxable. And then
you subtract from that sum you'd been tracking.

On an ongoing basis, you simply track a single number.

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You defer taxation on whatever _return_ is made on that
investment for 30 years. That's some powerful good stuff -
_especially_ if you've got 30 years.


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franksplace2[at]email.com (FranksPlace2) writes:

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It is trivial.

First, you don't have to track any fraction. You simply need to know
the remaining amount of non-deductible contributions you have.

Second, you should have been filing Form 8606 with your return every
year you made a non-deductible contribution, so you trivially know the
total of all non-deductible contributions you've ever made -- just
look at your most recent Form 8606.

Third, once you do make withdrawals, you again need to file Form 8606,
which among other things will tell you your remaining non-deductible
contributions after that year's distributions. So in subsequent
years, you again just look at your most recent Form 8606.

Let's say you've made $10,000 of non-deductible contributions over the
years and that before this year you've never made a distribution.
This year you made a distribution of $15,000. Assume further that the
total 12/31/xx value of all your traditional IRAs (which you can get
simply by adding up your year-end balances from your account
statements) is $230,000.
Step 1 - correct the year-end value for distributions
taken during the year: $230,000 + $15,000 = $245,000

Step 2 - compute the fraction of non-deductible contributions
in the account: $10,000/$245,000 = 0.04082

Step 3 - multiply distribution by the Step 3 fraction to
determine non-taxable part of distribution:
$15,000 * 0.04082 = $612.30

Step 4 - subtract non-taxable part from total distribution
to determine taxable part: $15,000 - $612.30 = $14,387.70

Step 5 - subtract non-taxable part from non-deductible
contribution total to get the amount of remaining non-deductible
contributions to use in next year's calculations (this will
be the number you use in Step 2 of next year's calculations):
$10,000 - $612.30 = $9,387.70

Further note that:
* Form 8606 leads you through all five of those steps.
* Form 8606 documents what your non-deductible contributions are,
both when you are making non-ded contributions and when you
are making trad IRA withdrawals.

So to be able to calculate this, you only need three things:
(a) a copy of the most recent Form 8606 you filed.
(b) a blank copy of this year's Form 8606
(c) year end statements from all your traditional IRA accounts.

In all, a trivial paperwork burden and a trivial calculation.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

It doesn't seem trivial to me. The amount that has been taxed gets
mixed with all your other IRA funds so it becomes a small fraction -
say 5% - but still represents multiple thousands in tax non-liability.
You must track the fraction, which changes every year for the rest of
your life. You defer the value of the tax non-liability for 30 years.
Not a good investment...

Frank


BreadWithSpam[at]fractious.net wrote in message news:<yobekqnzqg2.fsf[at]panix3.panix.com> ...

Anyone who's put money
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pmb[at]his.com (Paul Michael Brown) writes:

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Actually, it's quite trivial. Anyone who's put money
into his IRA but had income high enough that he was not
permitted to deduct it is in the same boat. All one
does is track the "cost basis" of his account. In the
case of the IRA, when he takes distributions from that
IRA, a portion of that distribution is not subject to
income taxes - a percentage which matches the percentage
of the account balance represented by his non deductible
contributions. And then the cost basis is reduced by
that much.


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An excellent start.

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I'm not a tax expert, but it sounds right. The problem here, it seems to
me, is that it would be an accounting nightmare to have a single account
where some of the contributions are tax deferred and some are after tax
money. In my view, this would be difficult to figure out both while this
couple is working and contributing and after they retire and start
withdrawals.

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Now that this couple is maxed out on their tax deferred accounts (401K &
Roth) they need to start investing in their taxable account. Most people
never save enough money to have this problem, so 99 percent of investment
advice in the popular press focuses on the tax deferred strategies. As a
result, I think people get the impression that investing in a taxable
account is somehow unwise. Not so. As this couple proves, if you want to
retire in your early 50s you really *must* save quite a bit of after tax
money so that you'll have something to live on before you can start
penalty free withdrawals from the tax deferred accounts and collecting
Social Security. I would recommend they use any of the big companies that
offered a family of funds. I like Vanguard because of their low fees and
honest management. But others may like other companies.

Obviously, the question is what funds to invest in. This will require the
couple to get a handle on their overall asset allocation. They're doing
the hard part, which is living on less than they earn and saving the
difference. But they should be careful not to make the mistake of saving a
bunch of money without keeping track of how it's invested. To me, this is
the difference between a AAA investor and a major league invester. They
need to create a spread sheet that lists all of their liquid assets and
the percentage devoted to equities, fixed income and cash. They also need
to break it out by subclass (domestic equities, international equities,
large cap, small cap, etc.) You can do this using any of the popular
financial software packages.

Constructing a diversified portfolio isn't as daunting as it sounds. They
can be well diversified by investing in as little as three index funds:
(1) Wilshire 5000; (3) EAFE; (3) Shearson Lehman Total Bond Market, plus
any money market fund or savings account. Just off the top of my head, for
a couple in their early 30s they might start with 58 percent domestic
equities (Wilshire), 12 percent international equities (EAFE), 25 percent
in domestic fixed income (SL Total Bond) and 5 percent in cash. I'm sure
other folks will have their own suggestions.

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Munibonds are usually thought of as an investment for the high bracket
types, and I'm not sure this couple qualifies. However, if they can find a
state specific munibond fund the income they earn will be double tax
exempt. That might make the low yield more attractive. Another reason to
look at munibond funds is that they are generally less volatile than
taxable bond funds and the NAV declines less when interest rate rise. (As
they have been in the past two weeks.) I own several of the Vanguard
munibond funds and I would recommend them.

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Also known as index funds. As for managing the asset allocation, once you
construct the spread sheet it's actually easy.

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Then don't try. You can do just fine with index funds.

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As a rule, annuities are only a good deal for the folks who sell them. You
are wise to steer clear.

Miscellaneous idea in closing: Pay down or pay off your mortgage. If you
own a home free and clear it sure makes retirement cheaper.

formattm[at]yahoo.com (Matt) wrote in message news:<4f9b2343.0404072006.7b67d753[at]posting.google.com> ...
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what you called the hard part). Do you think Microsoft will be around
20 more years? How about General Electric? General Motors? Pick
really large mega cap stocks and you should be OK for a 20 year
period. You will possibly make 1 mistake, but if you own 20 stocks, 1
mistake isn't so bad (and you can write losses off on tax returns if
you itemize).

The advantage of this over the 401k is you can sell these stocks at
(lower) capital gains rates (just like index funds). The other
advantage is you can seel these stocks to generate income and let the
401k money grow another year or two when you finally do retire (defer
taxes as long as you can).

Adding more to 401k won't gain you much, and accessing that money will
have lots of rules associated with it. I'd look into withdraw rules
deeper before doing that.

Life insurance may be another option (permanent insurance). I just
bought my first product like this, so I don't know enough to comment
too much. My earnings are tax deferred and tied to S&P 500 index, and
guaranteed to grow 2% each year.

Consult a professsional on all this- I just know what I do and read...

Jim

IF YOU ARE ALREADY MAXING OUT YOUR ROTH (BOTH YOURS AND YOUR WIFE'S)
AFTER_TAX CONTRIBUTIONS TO YOUR 401(k) IS INDEED A GOOD OPTION. ANOTHER
INTERSTING OPTION IS AS FOLLOWS"

I'VE HEARD THIS CALLED THE "3 BASKET STRATEGY" IN APRIL'S MONEY
MAGAZINE. IT REFERS TO DIVERSIFICATION FOR TAX PURPOSES IN RETIREMENT.
BASKET #1 IS DEFERRED-TAX SAVINGS (YOUR 401(k) FITS THIS BILL), BASKET
#2 IS TAX-FREE WITHDRAWLS (YOUR ROTH FITS THIS BILL) AND BASKET #3 IS
LONG-TERM TAXABLE CAPITAL GAINS (WHICH WOULD BE TAXED AT 15% UNDER THE
NEW CAPITAL GAINS TAX PROVISIONS). A GAMUT OF OPTIONS WOULD FIT THE
BILL FOR BASKET #3 INCLUDING TAX-EFFICIENT FUNDS, LONG-TERM REAL ESTATE
INVESTMENTS (NOT REITS WHICH REGULARLY DISTRIBUTE DIVIDENDS) AND ALMOST
ANY OTHER INVESTMENT IN WHICH CAPITAL GAINS WOULD NOT BE REALIZED IN THE
SHORT TERM

Matt wrote:
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There was another thread recently with a similar question and one of
our smart contributors suggested index funds. They don't generate a
lot of capital gains or dividends on an annual basis and are taxed at
capital gains rates when you withdraw the money.

Liquidity, reasonable growth and no limits Seems like a good idea to
me

Frank


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Does your income level disqualify you for the Roth IRA? If not, that seems
the place to go next.

Do you have any children?

"Matt" <formattm[at]yahoo.com> wrote in message
news:4f9b2343.0404072006.7b67d753[at]posting.google.com...
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My wife and I are trying to save as much as we can with a goal of
early retirement. The current target is to retire when we are in our
early-fifties. We are currently in our thirties.

We have exhausted the usual options for retirement savings -- we are
contributing the maximum pre-tax contribution allowed for our 401(K)'s
and are also maxing out our Roth IRA's.

I am looking at contributing more money to my 401(K) at work that
allows after-tax contributions. Based on the information provided by
my company, I will only be taxed on the earnings portion of this money
when I withdraw it. It also seems that I will be able to withdraw this
money without paying a penalty before I am 59 1/2 as is required for
pre-tax contributions. Does this seem correct?

My 401(K) at work is well-managed and provides enough options for
diversification, so I am inclined to go with them. Are there any other
options we should be looking at? I would like a savings vehicle that
will allow us to withdraw while we are in our fifties without any
penalty. We will hopefully not need this money until after we retire
(we have set aside money for an emergency account, and have a 529
college savings account for our child, and have no debts besides a
mortgage)

The other options I know of are:
- Municipal bond funds (we are in the 31.5% tax bracket: 25% fed +
6.5% state) but these seem to have low returns.
- Tax-efficient mutual funds, but not sure about how I will be able to
manage the asset allocation in the future.
- Individual stocks/DRIPs, but I am no good at picking stocks.
- Some kind of annuity, but these seem too complex and I'd like to
avoid it unless there is a strong advantage.
- Anything else?

Thanks for any advice.

Matt