- quote -

More like it changes about every decade. Carter lowered CG tax,
Reagan raised it, Clinton lowered it ....
Because of deferred account limits and lousy VAs until recently,
I maintained a hybrid-approach of doing both deffered and
after-tax investing.
Some years one looked better than the other.

- quote -

Some of the mutual fund companies have set up insurance cos
that sell VAs with overheads (.35%) lower than many regular mutual
funds,
and no penalties. The only drawback I saw was limited trading
(about once a month), i.e. if you want daytrade use an ETF.

"Will Trice" <wwtrice[at]paragondynamics.com> wrote
- quote -

Joetaxpayer presented me with a spreadsheet demonstrating
similar. He used a low expense VA a la Fidelity's or
Vanguard's. From experimenting with it, I agree a "regular
ol'" taxable account can compete well with (even beating at
times) a tax deferred VA (or non-deductible contributions to
a traditional IRA). This is particularly so as long as the
dividend and capital gain tax rates are so low. If these
rates had not dropped in 2003, then we might have more of an
argument for the VA, especially for those in higher income
brackets anticipating being in a lower income bracket.

But such assumptions are cheating. ISTM it comes down to
what S. Weldon points out often: We cannot know what the tax
rates are going to be in the future, arguably especially the
distant future.

I think this reality--what future tax rates will be--throws
a particularly huge wrench into what to do after (1) through
(3) above.

At the moment I am wondering if these facts, combined with
the overwhelming number of ripoff VAs available, is why so
many offering counsel on financial planning reject tax
deferred VAs outright.

Elle wrote:

- quote -

It seems that just a regular ole brokerage account would do better than
4 or 5 from a strictly return-based perspective. Unless the investor in
question is investing in a mighty tax inefficient way?

-Will

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote
snip per moderator's guide
- quote -

Nit: $5000 for age 50 or over by year's end.

- quote -

I read more and see you are correct.

Thus the non-deductible Trad IRA is only a viable option if,
among other things, for some reason one cannot qualify to
contribute the max to a Roth IRA. For example, an individual
may hit the income limit for a Roth IRA and so be unable to
contribute fully to it.

"Elle" <honda.lioness[at]nospam.earthlink.net> writes:

- quote -

I'd put the non-deductible Trad IRA first, but that assumes,
as you said, a fully maxed out 401k and being inelgible to
contribute to a Roth. If you've maxed out your Roth, you
cannot put anything into a Trad IRA anyway.

Advangtages of non-deductible IRA:
(a) vastly cheaper. Even the very cheapest VAs are > 50bp/yr
(b) vastly better selection of available investments -
almost anything at one's brokerage as well as, even,
possibly investment real estate, etc.
(c) potential to roll into a Roth at some point later on

Advantages of VA:
(a) possibility of getting insurance riders - ie. guaranteed
minimum benefits, lifetime income, etc. All at a cost,
and many of which are possible by buying other insurance
products at some other point in time or in addition to
a regular IRA (ie. buy an immediate annuity at retirement, etc)
(b) ability to put a lot more money in (ie. no limit)

Given that, IMO, most folks don't need most of those insurance
riders (and they have other means of getting similar coverage -
ie. term, etc), I'd say that the real advantage of VAs is the
unlimited amount one can put in. So in general, I'd say to
max out the non-deductible IRA first. To me, that's a no-brainer.

Assuming, again, no interest in the insurance riders -
after *that* however, it's not as obvious - for example, which
is better - a VA or just sticking money into a tax efficient
fund (ie. low-cost index or even tax-managed quasi-index fund).

Advantages to tax-managed fund (assuming it basically just
distributes minimal income and almost no cap-gains and almost
all of one's tax liabilities are those generated when selling
later on - for long-term cap gains):
(a) unlimited contributions
(b) effective tax deferral
(c) most taxes will be long-term cap gains
(d) no penalty for early withdrawal
(e) step up basis if it gets inherited
(f) generally very very low management fees

Advantages to VA
(a) well, those possible insurance riders, again
(b) unlimited contributions
(c) potentially better protection against lawsuits
(d) may not count as assets for college financial aid


--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

Elle wrote:
- quote -

That site shows;
"Non-deductible contribution to a traditional IRA.
Even if you're covered by an employer plan and you're above the AGI
limit for a Roth IRA or a deductible contribution to a traditional IRA,
you can still make a non-deductible contribution to a traditional IRA."

The $4000 limit (per year per person) for under age 50 ($5000 for over)
is the max annual deposit across all IRA variants. I don't see how the
Schwab wording was ambiguous.

JOE

<woessner[at]gmail.com> wrote
- quote -

Sites like
http://www.schwab.com/public/schwab/...refid=P-466598
(third subject line from the bottom) indicate otherwise. I
see this particular site even suggests the same parallel
(between the non-deductible Trad IRA contribution and a
deferred variable annuity) that I suggest. Not that what I'm
saying here is novel. I see from the archives it has been
touched upon here at the group now and then, for one.

- quote -

You're right that the general priority should be
1) Contribute to 401(k) up to employer's matching to get the
immediate 50% or so return on one's money and tax advantage.
2) Contribute to Roth IRA to max, to get the tax advantage.
3) Resume contributions to 401(k) to get the tax advantage.

Followed possibly by:
4) [Under investigation but possibly: Contribute
non-deductible amount to Traditional IRA, unlimited. Use IRS
Form 8606. This gives you tax-deferred growth plus the
possibility of converting this amount+earnings to a Roth.]
5) Low expense, no surrender fee variable annuity.

Elle wrote:
- quote -

It's my understanding that the IRA maximum is for both Roth and
traditional, combined. So if the individual in question has already
made a maximal Roth contribution, he cannot make a traditional
contribution, not even a non-deductible one.

In the scenario you described, I would advise the individual to
contribute more to the 401(k). You said he had maxed out the matching
portion, but I'm assuming he hasn't hit the $15K annual limit.

--Bill

"David Efflandt" <efflandt[at]xnet.com> wrote
- quote -

Beg pardon. I was already assuming that the individual had
maxed out the matching of his/her 401(k) along with
contributions to a Roth IRA.

The question I am exploring is: What next for retirement
investing? Some list the VA, but ISTM that non-deductible
contributions to a Trad IRA may be better or at least as
good.

David Efflandt wrote:

- quote -

May I ask, what kind of hit did you take? Did you pay a large surrender fee?

JOE

On Sun, 23 Jul 2006, Elle <honda.lioness[at]nospam.earthlink.net> wrote:
- quote -

If you are going to make non-deductable contributions, you should first
max out a Roth IRA (if eligible), because that and its gains are never
taxed again.

Whereas, "gains" from the same contributions to traditional IRA or VA are
taxed when converted to a Roth or distributed. I didn't realize that the
"A" in my IRA at an insurance company referred to annuity. But I have
since transferred that to a regular IRA and am gradually converting that
to a Roth IRA at annual amounts that do not bump my marginal tax bracket.

- quote -

could do better with the lower tax rate of long term taxable gains.

Variable annuities often have a few more bells and whistles
(death benefit; lifetime income benefit), but otherwise, is
there any reason not to recommend these (non-deduct.
contributions to trad. IRA vs. VA) side by side? Or perhaps
even recommending the non-deductible traditional IRA route
over the VA route because shopping around for low expenses
is easier with a traditional IRA? Plus, there is an
opportunity to convert the traditional IRA to a Roth IRA, so
withdrawals are not taxed, period per
http://taxes.about.com/b/a/249790.htm . Admittedly, this
involves paperwork, but with all the tracking of paperwork
involved in an annuity, perhaps the workload may be said to
be comparable.

These methods of retirement investing both offer tax
deferred savings.

Upon retirement (at the legal age limits, that is),
withdrawals for both are taxed at ordinary income tax rates.