- quote -

And during retirement. Considerining major changes every decade
since I recall in the 1970s (Carter lowers gain tax, Reagan
increases it, Clinton lowers it, etc.) an up to 70 year period
for young workers is bound to change again. The general rule
doesnt change: try to save & invest some, and pay attention to
tax advantages.

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- quote -

Well, one reason might be that capital gains are taxed at a
lower rate than ordinary income, and IRAs convert all of the
earnings into ordinary income. With an index fund, unless
there are lots of people redeeming shares, there are usually
very little capital gains distributions made (since the fund
doesn't need to sell any securities). That means that the
choice of when to realize the capital gains can be
controlled. Also, any qualified dividends would enjoy a
preferential tax rate as well, although the taxes would not
be deferred.

Of course, this all assumes that the tax rules don't change
again by retirement.

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Barry Margolin <barmar[at]alum.mit.edu> wrote:

- quote -

I don't use the term "no-brainer" in personal finance
because situations vary too much - what's "no-brainer" to
one person may not be to another.

One reason to consider an index fund (like VFINX) outside of
an IRA over the same fund in a non-deductible IRA is that
the fund is almost tax-deferred anyway. The dividend yield
is a paltry 1.7% (most of which qualifies for the dividend
exclusion) and I can't recall the last capital gains
distribution. And then we get long-term gains taxed at
capital gains rates instead of ordinary income. Other
thoughts are that it's much more liquid than an IRA (no age
59.5 problems), gets a basis step-up at death and does not
involve minimum distribution messiness that can affect
Social Security and other benefits.

On the other hand we could make an exception if the investor
wished to hold bonds or other taxable income investments.
That could be a case for a non-deductible IRA. Although
with rates rising perhaps "no-brainer" would be a suitable
description for someone buying fixed-rate bonds today. Or
Georgia football fans. <grin
-HW "Skip" Weldon
Columbia, SC

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Barry Margolin <barmar[at]alum.mit.edu> wrote:
- quote -

If it's a non-deductible IRA, and you expect primarily
growth (long term capital gains), then you might well be
better off keeping the money out of the IRA.

Seth

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"HW \"Skip\" Weldon" <skip5700removethis[at]hotmail.com> wrote:

- quote -

Since you can invest in any no-load low-cost mutual fund
through an IRA, why would you choose to invest it in a
taxable account when a tax-deferred account is available?
It seems like a no-brainer.

The only reason I can think of to avoid a tax-deferred
account is if you think you might be in a higher tax bracket
after you retire than before.

--
Barry Margolin, barmar[at]alum.mit.edu
Arlington, MA
*** PLEASE don't copy me on replies, I'll read them in the group ***

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- quote -

Depending on how the investor wanted to invest (equities vs.
fixed) and the quality of the 401k (matching and funds) I'd
probably put a no-load low cost mutual fund like an index
fund at #2. Remember that in the end "where to save" is an
investment issue, and the three main focus points should be
to diversify, save regularly, and watch costs. In the end
taxes are but a small part of costs.

-HW "Skip" Weldon
Columbia, SC

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There was an article in the WSJ two weeks ago about new
no-frill annuities like Fidelity offers. Their insurance
charge 0.25% (compared to an industry average of 1.5%), and
there is no surrender penalty other than IRS early withdrawal
penalties. Fidelty also wraps about three dozen funds at last
count. WSJ mention other big fund companies are offering these
(they have to buy/create an insurance subsidary first).

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ames Lewis wrote:

- quote -

The big advantage of an annuity is that you don't face the
limits on the amount that can be contributed to a
nondeductible IRA. As well, the insurance company will
track the tax basis of the annuity and issue 1099s that will
tell you the tax status of any distributions--things that
won't happen with an IRA. As well, each annuity stands on
its own for tax basis, while the nondeductible IRAs are all
combined in one pool

The advantage of the nondeductible IRA is that there is no
requirement that you have an insurance "wrapper" on the
investment. So if the client doesn't want what is provided
by that insurance wrapper, it may produce better returns to
have an IRA instead.

- quote -

That would depend on a number of factors, but a customized
plan that a plan consultant could provide *could*, with the
right other facts, substantially increase the contributions
made to his account by taking advantage of various plan
design features. The contribution would be one made by the
company and there would likely be some contributions made
for employees--the test is how much those contributions
would end up being vs. what he can put back.

--
Ed Zollars, CPA
Podcast located at http://ezollars.libsyn.com

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"James Lewis" <jmpj[at]verizon.net> wrote:

- quote -

One thing you should discuss with him is the 2010
elimination of the income limit for Roth conversions. If
that law holds up through the next two election cycles, he
would then be able to convert his traditional IRA in 2010.

--
Phil Marti
Clarksburg, MD

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"James Lewis" <jmpj[at]verizon.net> wrote:

- quote -

Did he ask if he *could*, or if he *should*? Anyone with
earned income can make an IRA contribution, so it seems like
the more pertinent question is the latter.


- quote -

Annuities generally have higher fees and fewer investment
choices than IRAs. In general, I think most recommend:

1. Max out your 401K. If you can't afford that, at least
max out the portion that gets employer matching.

2. Then max out your IRA.

3. Then if you still have money you want to put away for
retirement, consider an annuity.

--
Barry Margolin, barmar[at]alum.mit.edu
Arlington, MA
*** PLEASE don't copy me on replies, I'll read them in the group ***

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I have a client whose combined salary and S corp income is
about $500k. He participates the max allowed in his 401k
provided in his S corp. He has about 4 other employees that
also participate. He asked me if he could make an IRA
contribution even if its non-deductible.

Questions:
1. Is a non-deductible IRA as good or better than a regular
annuity that also defers income on the earnings?

2. Are there changes he can make to increase his deductible
pension contribution?

mike

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