Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

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afr
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Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by afr »

[Moved into a stand-alone thread from: Taxable account or non-deductible tIRA? --admin LadyGeek]

I'm currently 56 yrs. old(wife is 51) and am planning to retire in another 11 yrs.(at age 67 when I'll qualify for SS). We're in the 33% tax bracket and both of us are W-2's. This is what we currently have towards retirement:
Me-401k(not matched)-182k(max out yearly)
non-deductible TIRA-71k(max out yearly)
old Roth IRA-11k(no longer contribute)

wife-non-ded TIRA-53k(max yrly)
old Roth IRA-12k

We also have a joint taxable account-81k Would it make sense at this point to just discontinue our non-ded TIRA contributions and just fund my 401k and joint taxable accounts only? Or is the damage already done?
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retiredjg
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Re: Taxable account or non-deductible tIRA?

Post by retiredjg »

The money is going to be taxed at about 33% either way. The difference is what happens to the earnings. In taxable the earnings from stocks are not taxed till you withdraw and they are taxed at a lower cap gains rate (which might even be 0%). In the tIRA, the earnings will be taxed at your ordinary rate when the money is withdrawn.

That tends to argue for putting the money in taxable. But I don't think it is that simple for someone approaching retirement.

If almost all of the contents of the tIRA is already taxed, when you retire you might be able to convert it to Roth IRA paying tax only on the earnings which might be relatively small.

I might be tempted to put money into taxable until about 3 years before retirement at which time I'd start sending it to tIRA again. There would not be a lot of time for the money to grow before retirement and you could do a Roth conversion(s) before RMDs start.

I would not worry about "damage already done". The important thing is saving money.

Do you know how much basis you have in each of the tIRAs?
Last edited by retiredjg on Thu Jul 28, 2016 1:15 pm, edited 1 time in total.
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Re: Taxable account or non-deductible tIRA?

Post by livesoft »

afr wrote:We also have a joint taxable account-81k Would it make sense at this point to just discontinue our non-ded TIRA contributions and just fund my 401k and joint taxable accounts only? Or is the damage already done?
Yes, discontinue contributions to non-deductible tIRAs.
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Re: Taxable account or non-deductible tIRA?

Post by afr »

retiredjg wrote:The money is going to be taxed at about 33% either way. The difference is what happens to the earnings. In taxable the earnings are not taxed till you withdraw and they are taxed at a lower cap gains rate (which might even be 0%). In the tIRA, the earnings will be taxed at your ordinary rate when the money is withdrawn.

That tends to argue for putting the money in taxable. But I don't think it is that simple for someone approaching retirement.

If almost all of the contents of the tIRA is already taxed, when you retire you might be able to convert it to Roth IRA paying tax only on the earnings which might be relatively small.

I might be tempted to put money into taxable until about 3 years before retirement at which time I'd start sending it to tIRA again. There would not be a lot of time for the money to grow before retirement and you could do a Roth conversion(s) before RMDs start.

I would not worry about "damage already done". The important thing is saving money.

Do you know how much basis you have in each of the tIRAs?
Thanks for the response. Yes, my basis is $39,500 and my wife's is $26,500.
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Re: Taxable account or non-deductible tIRA?

Post by retiredjg »

So there is a good amount of untaxed money in each IRA. I think I'd use taxable for now. Consider tIRA in the last years before retirement. Or not.

The one thing that might make me contribute more to the tIRA is if I needed more space for bonds (since I don't want to put bonds in taxable).

Saying this makes me remember that what I said earlier only applies to stocks, not bonds. I need to edit that.
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Re: Taxable account or non-deductible tIRA?

Post by afr »

retiredjg wrote:So there is a good amount of untaxed money in each IRA. I think I'd use taxable for now. Consider tIRA in the last years before retirement. Or not.

The one thing that might make me contribute more to the tIRA is if I needed more space for bonds (since I don't want to put bonds in taxable).

Saying this makes me remember that what I said earlier only applies to stocks, not bonds. I need to edit that.

Thanks. Our current TIRA's(and old Roth IRA's) each sit in the STAR fund. The breakdown for the joint taxable is the following:
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Re: Taxable account or non-deductible tIRA?

Post by BL »

afr wrote:I'm currently 56 yrs. old(wife is 51) and am planning to retire in another 11 yrs.(at age 67 when I'll qualify for SS). We're in the 33% tax bracket and both of us are W-2's.
...
wife-non-ded TIRA-53k(max yrly)
old Roth IRA-12k

.. Would it make sense at this point to just discontinue our non-ded TIRA contributions and just fund my 401k and joint taxable accounts only? Or is the damage already done?
Have you considered delaying SS until age 70 to get a larger COLA-enhanced pension for as long as one of you lives? Will you have a pension?

Are you saving only 24k + 6.5 + 6.5 each year? Have you calculated how much you can withdraw at 4%/yr or less in retirement? At 33% tax bracket you must have over @275k/yr salary. Do you or spouse have any Flex or other tax-saving plans available?

You could save fixed income in I-Bonds where the tax is deferred until you withdraw or in Vanguard municipal bonds if you don't have room in 401k/IRAs.

Total stock market and total international are quite tax-efficient for taxable.
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Re: Taxable account or non-deductible tIRA?

Post by afr »

BL wrote:
afr wrote:I'm currently 56 yrs. old(wife is 51) and am planning to retire in another 11 yrs.(at age 67 when I'll qualify for SS). We're in the 33% tax bracket and both of us are W-2's.
...
wife-non-ded TIRA-53k(max yrly)
old Roth IRA-12k

.. Would it make sense at this point to just discontinue our non-ded TIRA contributions and just fund my 401k and joint taxable accounts only? Or is the damage already done?
Have you considered delaying SS until age 70 to get a larger COLA-enhanced pension for as long as one of you lives? Will you have a pension?

Are you saving only 24k + 6.5 + 6.5 each year? Have you calculated how much you can withdraw at 4%/yr or less in retirement? At 33% tax bracket you must have over @275k/yr salary. Do you or spouse have any Flex or other tax-saving plans available?

You could save fixed income in I-Bonds where the tax is deferred until you withdraw or in Vanguard municipal bonds if you don't have room in 401k/IRAs.

Total stock market and total international are quite tax-efficient for taxable.
Delaying SS til 70 is out of the question(for reasons of maintaining my sanity). We' have no pension. I save 23k in my 401k, and 6500 each in our TIRA's. No flex spending or medical benefits for either of us. I'm also to assume that there
s no limit as to how much we can contribute to the joint taxable account yearly, unlike our TIRA's. I also forgot to ask, but will we still have to submit 8606's even if we discontinue the non-ded. TIRA contributions? Will we have to submit any tax forms for the joint taxable account? Will the earnings on that account have an effect on our current and future taxes while I continue to work?
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Re: Taxable account or non-deductible tIRA?

Post by retiredjg »

afr wrote: I also forgot to ask, but will we still have to submit 8606's even if we discontinue the non-ded. TIRA contributions?
Your last form 8606 is current until something changes. Keep a copy with your current taxes each year. You do not need to file a new one each year unless you make another contribution or do a Roth conversion or a withdrawal from Roth IRA.
Will we have to submit any tax forms for the joint taxable account? Will the earnings on that account have an effect on our current and future taxes?
You will likely have some annual income in the taxable account. There might be some small capital gains distributions (even if you don't sell anything) and maybe some dividends. So yes, the taxable account will require an extra form or maybe a couple. If you put actively managed stock funds in taxable, or taxable bond funds you may have enough income for it to be a nuisance and not very tax efficient.

I suggest you use only tax efficient stock index funds in taxable. The usual suggestions are a total stock index and/or a total international index.

As for future taxes, when you sell something, part of what you sell is money that has already been taxed. This return of your investment does not require that you pay tax. But whatever is a gain over what you paid for that share (those shares) will be taxed at capital gains rates.

This link may help get you started, but I think you might benefit from Taxes for Dummies or some other basic tax book. It sounds like you've got a lot of catching up to do and you need to keep your "learning the hard way" experiences to a minimum.

https://www.bogleheads.org/wiki/Tax_basics
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Re: Taxable account or non-deductible tIRA?

Post by CppCoder »

I'm also to assume that there's no limit as to how much we can contribute to the joint taxable account yearly, unlike our TIRA's.
I think that was a question? :confused If so, the answer is no, there is no limit on contributions to a taxable account.
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Re: Taxable account or non-deductible tIRA?

Post by afr »

retiredjg wrote:
afr wrote: I also forgot to ask, but will we still have to submit 8606's even if we discontinue the non-ded. TIRA contributions?
Your last form 8606 is current until something changes. Keep a copy with your current taxes each year. You do not need to file a new one each year unless you make another contribution or do a Roth conversion or a withdrawal from Roth IRA.
Will we have to submit any tax forms for the joint taxable account? Will the earnings on that account have an effect on our current and future taxes?
You will likely have some annual income in the taxable account. There might be some small capital gains distributions (even if you don't sell anything) and maybe some dividends. So yes, the taxable account will require an extra form or maybe a couple. If you put actively managed stock funds in taxable, or taxable bond funds you may have enough income for it to be a nuisance and not very tax efficient.

I suggest you use only tax efficient stock index funds in taxable. The usual suggestions are a total stock index and/or a total international index.

As for future taxes, when you sell something, part of what you sell is money that has already been taxed. This return of your investment does not require that you pay tax. But whatever is a gain over what you paid for that share (those shares) will be taxed at capital gains rates.

This link may help get you started, but I think you might benefit from Taxes for Dummies or some other basic tax book. It sounds like you've got a lot of catching up to do and you need to keep your "learning the hard way" experiences to a minimum.

https://www.bogleheads.org/wiki/Tax_basics

I believe this is fairly tax efficient . The bond fund is limited term tax exempt.
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Re: Taxable account or non-deductible tIRA?

Post by Thrifty Femme »

retiredjg wrote: Your last form 8606 is current until something changes. Keep a copy with your current taxes each year. You do not need to file a new one each year unless you make another contribution or do a Roth conversion or a withdrawal from Roth IRA.
Can one file a 8606 form this year 2009?
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Re: Taxable account or non-deductible tIRA?

Post by retiredjg »

Thrifty Femme wrote:
retiredjg wrote: Your last form 8606 is current until something changes. Keep a copy with your current taxes each year. You do not need to file a new one each year unless you make another contribution or do a Roth conversion or a withdrawal from Roth IRA.
Can one file a 8606 form this year 2009?
If you want to document a non-deductible contribution to tIRA, you can download the 2009 form from the internet and send it in. If there are other forms following 2009, you'll need to do new ones since each form builds on the previous one.

If you need the 8606 for something else (say to document a Roth conversion) I think that would require an amended return and I don't think you can go back that far.
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Re: Taxable account or non-deductible tIRA?

Post by retiredjg »

afr wrote:I believe this is fairly tax efficient . The bond fund is limited term tax exempt.
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The health care fund is not tax-efficient. The others are probably not too bad.

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Re: Taxable account or non-deductible tIRA?

Post by Thrifty Femme »

retiredjg wrote:
Thrifty Femme wrote:
retiredjg wrote: Your last form 8606 is current until something changes. Keep a copy with your current taxes each year. You do not need to file a new one each year unless you make another contribution or do a Roth conversion or a withdrawal from Roth IRA.
Can one file a 8606 form this year 2009?
If you want to document a non-deductible contribution to tIRA, you can download the 2009 form from the internet and send it in. If there are other forms following 2009, you'll need to do new ones since each form builds on the previous one.

If you need the 8606 for something else (say to document a Roth conversion) I think that would require an amended return and I don't think you can go back that far.
Thanks!
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Re: Taxable account or non-deductible tIRA?

Post by afr »

retiredjg wrote:
afr wrote:I believe this is fairly tax efficient . The bond fund is limited term tax exempt.
VEXMX-3100
VGHCH-9200
VMLTX-15,400
VGTSX-6700
VTSAX-46,500
The health care fund is not tax-efficient. The others are probably not too bad.

Remember that it is helpful to put names with your tickers. :happy
Any particular reason the health care fund isn't tax efficient?
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Re: Taxable account or non-deductible tIRA?

Post by retiredjg »

afr wrote:Any particular reason the health care fund isn't tax efficient?
It is the nature of actively managed funds to not be tax-efficient. Fund managers are selling and buying stuff, trying to keep the fund in what they predict and guess will work out best. This buying and selling results in built up gains (and losses) inside the fund and this can be passed on to the shareholders.

Index funds, on the other hand, have very low turnover and pay very low (if any) capital gains distributions each year. And most index funds (except those designed to actually do it) pay out low amounts of dividends each year.

For this reason, it is almost always suggested to hold broad (as in whole market) index funds (not actively managed funds) in your taxable account. Narrower range index funds are also pretty tax-efficient, but not quite as good.

Not paying extra tax is part of keeping costs low. Keeping costs low is about the only thing you actually have any control over when it comes to investing.

If you have not read it, this website has a lot of information (probably a lot more than many people can understand at first so don't get discouraged).

https://www.bogleheads.org/wiki/Tax-eff ... _placement
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Re: Taxable account or non-deductible tIRA?

Post by afr »

"The money is going to be taxed at about 33% either way. The difference is what happens to the earnings. In taxable the earnings from stocks are not taxed till you withdraw and they are taxed at a lower cap gains rate (which might even be 0%). In the tIRA, the earnings will be taxed at your ordinary rate when the money is withdrawn.

That tends to argue for putting the money in taxable. But I don't think it is that simple for someone approaching retirement.

If almost all of the contents of the tIRA is already taxed, when you retire you might be able to convert it to Roth IRA paying tax only on the earnings which might be relatively small.

I might be tempted to put money into taxable until about 3 years before retirement at which time I'd start sending it to tIRA again. There would not be a lot of time for the money to grow before retirement and you could do a Roth conversion(s) before RMDs start."



Forgive my ignorance, but what would be the difference either way if my wife and I are in the 15% tax bracket during retirement years? If we do a Roth conversion in retirement(either full or partial and pay 15% of basis) on our non-deductible TIRA's versus dropping the contributions now and just contributing to our joint taxable account(paying capital gains of 15% in retirement) wouldn't it all essentially be a wash?
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Re: Taxable account or non-deductible tIRA?

Post by retiredjg »

afr wrote:Forgive my ignorance, but what would be the difference either way if my wife and I are in the 15% tax bracket during retirement years? If we do a Roth conversion in retirement(either full or partial and pay 15% of basis) on our non-deductible TIRA's versus dropping the contributions now and just contributing to our joint taxable account(paying capital gains of 15% in retirement) wouldn't it all essentially be a wash?
I'm not sure just what you are asking.

If you are asking what's the difference between 15% now and 15% later, there is no difference unless there is a phase out during one time or the other.

But if you are in the 15% bracket in retirement, your long term cap gains rate would be 0%, not 15%, so I don't understand your question at all.

What do you mean "pay 15% of basis"? Can you re-word the question? Or give an example? Or is my brain just fried at the end of this day? :happy
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Re: Taxable account or non-deductible tIRA?

Post by afr »

retiredjg wrote:
afr wrote:Forgive my ignorance, but what would be the difference either way if my wife and I are in the 15% tax bracket during retirement years? If we do a Roth conversion in retirement(either full or partial and pay 15% of basis) on our non-deductible TIRA's versus dropping the contributions now and just contributing to our joint taxable account(paying capital gains of 15% in retirement) wouldn't it all essentially be a wash?
I'm not sure just what you are asking.

If you are asking what's the difference between 15% now and 15% later, there is no difference unless there is a phase out during one time or the other.

But if you are in the 15% bracket in retirement, your long term cap gains rate would be 0%, not 15%, so I don't understand your question at all.

What do you mean "pay 15% of basis"? Can you re-word the question? Or give an example? Or is my brain just fried at the end of this day? :happy
Ok. If my wife and I discontinue our non-deductible TIRA contributions at this point and limit our "retirement" contributions to our joint taxable account, we'll most likely incur additional income taxes(from potential gains/dividends) at our current 33% rate for the next 11 yrs. before I retire. Am I correct in this assumption? However, if we continue our non-ded. TIRA contributions and convert to Roth in retirement yrs., wouldn't we be only taxed on the gains made on the TIRA accounts?
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Re: Taxable account or non-deductible tIRA?

Post by retiredjg »

afr wrote:Ok. If my wife and I discontinue our non-deductible TIRA contributions at this point and limit our "retirement" contributions to our joint taxable account, we'll most likely incur additional income taxes(from potential gains/dividends) at our current 33% rate for the next 11 yrs. before I retire. Am I correct in this assumption?
Not really. If you use broad stock index funds that are tax -efficient, there will be very little in capital gains distributions or dividends that will trigger tax over the next 11 years. When you retire and start selling things in the taxable account, your long term capital gains will be either 0% (if you are in the 15% bracket or lower) or 15% (if you are in the 25% bracket). This assumes tax law does not change.

Note that your Health Care fund in taxable will cause you to pay extra tax over the next 11 years because that fund is not tax-efficient (meaning it throws out a lot of something - cap gains distributions or dividends - each year).

However, if we continue our non-ded. TIRA contributions and convert to Roth in retirement yrs., wouldn't we be only taxed on the gains made on the TIRA accounts?
Yes. And only as you withdraw money from those accounts.
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Re: Taxable account or non-deductible tIRA?

Post by LadyGeek »

New member kba1988 has a similar question which I've moved into a stand-alone thread: Taxable account or non-deductible tIRA? [Portfolio help]
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Re: Taxable account or non-deductible tIRA?

Post by whattodonow »

If you contribute the max allowable to a tIRA, of which all is non-deductible due to income limiting ROTH or deductible, form 8606 is pretty straight forward right?

If I have a rollover IRA from a previous employer 401k (which I have contributed nothing to since rolling over), wouldn't none of that be non-deductible?

So if I've recently contributed to non-deductible, that would be the only money I need to list on the 8606.

Is that right?
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Re: Taxable account or non-deductible tIRA?

Post by retiredjg »

whattodonow wrote:If you contribute the max allowable to a tIRA, of which all is non-deductible due to income limiting ROTH or deductible, form 8606 is pretty straight forward right?
Yes. If all you want to do is document your non-deductible contributions, it is very easy. You just have to remember to carry that form forward each year, even the years you don't make a contribution. Clarification: you don't do new forms each year if you are not making contributions. The last form is valid until you make a change.
f I have a rollover IRA from a previous employer 401k (which I have contributed nothing to since rolling over), wouldn't none of that be non-deductible?
Probably. If any of that money had been Roth 401k, it probably would have gone to Roth IRA when you did the rollover. So all of your rollover is pre-tax (none is non-deductible) unless someone messed up.
So if I've recently contributed to non-deductible, that would be the only money I need to list on the 8606.
It appears so. If you have not done any conversions or withdrawals, you probably will only use a few lines of Form 8606. Keep this form (or the latest one you used) until all your IRA money is gone - this keeps you from getting taxed a second time on that money.

When you start making withdrawals, the amount that is already taxed will be pro-rated with the amount that has not been taxed - to determine how much of the withdrawal is taxed. Sounds complicated, but it is pretty simple.
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Re: Taxable account or non-deductible tIRA?

Post by afr »

retiredjg wrote:
afr wrote:Ok. If my wife and I discontinue our non-deductible TIRA contributions at this point and limit our "retirement" contributions to our joint taxable account, we'll most likely incur additional income taxes(from potential gains/dividends) at our current 33% rate for the next 11 yrs. before I retire. Am I correct in this assumption?
Not really. If you use broad stock index funds that are tax -efficient, there will be very little in capital gains distributions or dividends that will trigger tax over the next 11 years. When you retire and start selling things in the taxable account, your long term capital gains will be either 0% (if you are in the 15% bracket or lower) or 15% (if you are in the 25% bracket). This assumes tax law does not change.

Note that your Health Care fund in taxable will cause you to pay extra tax over the next 11 years because that fund is not tax-efficient (meaning it throws out a lot of something - cap gains distributions or dividends - each year).

However, if we continue our non-ded. TIRA contributions and convert to Roth in retirement yrs., wouldn't we be only taxed on the gains made on the TIRA accounts?
Yes. And only as you withdraw money from those accounts.

So at the present time, we'd pay less in taxes(now and in retirement) if we were to drop all future non-deductible TIRA contributions and limit our "retirement" contributions to my 401k and our joint taxable acct(dropping future contributions to the health care fund). Currently our joint taxable account consist of Vanguard total stock market index($46,900), limited term tax exempt fund(15,500), health care fund(9200),total int'l stock index(6900) and extended market index fund(3200). Would you still recommend doing a partial or full Roth conversion of our TIRA's when we retire?

Thanks,

Andy
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by LadyGeek »

FYI: I moved afr's discussion into a stand-alone thread from: Taxable account or non-deductible tIRA?.

livesoft's reply (Apr 07, 2015) deserves repeating here: Subject: Taxable account or non-deductible tIRA?
livesoft wrote:Gains in a traditional tax-deferred IRA are taxed as ordinary income at one's marginal income tax rate when they are withdrawn.

Gains in a taxable account invested tax efficiently are taxed at the lower long-term capital gains tax rate when they are withdrawn. Qualified dividends also get a preferential lower tax rate.

Thus, the non-deductible IRA is worse in terms of tax rates which is why I think one should not use a non-deductible IRA unless it gets converted quickly to a Roth IRA where gains are not taxed.

Another reason to not use non-deductible IRA are penalties for early withdrawal compared to no penalties for a taxable account. No tax-loss harvesting in a non-deductible IRA either, while a taxable account may have some TLH opportunities.
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Re: Taxable account or non-deductible tIRA?

Post by livesoft »

afr wrote:... our joint taxable acct(dropping future contributions to the health care fund). Currently our joint taxable account consist of Vanguard total stock market index($46,900), limited term tax exempt fund(15,500), health care fund(9200),total int'l stock index(6900) and extended market index fund(3200). Would you still recommend doing a partial or full Roth conversion of our TIRA's when we retire?
Not only don't add any contributions to the health care fund, but also do not reinvest distributions in that fund.

As for Roth conversions in retirement, cross that bridge when you get to it.
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Re: Taxable account or non-deductible tIRA?

Post by afr »

livesoft wrote:
afr wrote:... our joint taxable acct(dropping future contributions to the health care fund). Currently our joint taxable account consist of Vanguard total stock market index($46,900), limited term tax exempt fund(15,500), health care fund(9200),total int'l stock index(6900) and extended market index fund(3200). Would you still recommend doing a partial or full Roth conversion of our TIRA's when we retire?
Not only don't add any contributions to the health care fund, but also do not reinvest distributions in that fund.

As for Roth conversions in retirement, cross that bridge when you get to it.
Thanks for the advice. Forgive my ignorance, but how do I discontinue reinvesting distributions into the health care fund and what happens to them in the future? What do you think of the other holdings in my joint taxable account?

Thank You
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Re: Taxable account or non-deductible tIRA?

Post by retiredjg »

afr wrote:So at the present time, we'd pay less in taxes(now and in retirement) if we were to drop all future non-deductible TIRA contributions and limit our "retirement" contributions to my 401k and our joint taxable acct(dropping future contributions to the health care fund)
That is how it appears to me if you are investing the money in stock funds. If you are investing the money in bond funds, I'd consider putting money into non-deductible IRA.


Would you still recommend doing a partial or full Roth conversion of our TIRA's when we retire?
Roth conversions can be a good plan for people in a very low tax bracket early in retirement, before RMDs. This can occur if there is no pension and if SS is delayed. So whether Roth conversions, full or partial, is a good idea for you, there is no way of knowing without knowing a great deal more about your situation. And even then it is something of a guess.
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afr
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Re: Taxable account or non-deductible tIRA?

Post by afr »

afr wrote:
livesoft wrote:
afr wrote:... our joint taxable acct(dropping future contributions to the health care fund). Currently our joint taxable account consist of Vanguard total stock market index($46,900), limited term tax exempt fund(15,500), health care fund(9200),total int'l stock index(6900) and extended market index fund(3200). Would you still recommend doing a partial or full Roth conversion of our TIRA's when we retire?
Not only don't add any contributions to the health care fund, but also do not reinvest distributions in that fund.

As for Roth conversions in retirement, cross that bridge when you get to it.
Thanks for the advice. Forgive my ignorance, but how do I discontinue reinvesting distributions into the health care fund and what happens to them in the future? What do you think of the other holdings in my joint taxable account?

Thank You
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livesoft
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by livesoft »

Perhaps people are not responding because they cannot forgive your ignorance. Look at vanguard.com and see what you can figure out. Or call them up. I would have to do that in order to answer you, so it is just best if you do it yourself.

As for your other holdings, what are they? (Not just ticker symbols, please.)
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SGM
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by SGM »

I always maximized non-deductible tIRAs as well as maximized 401ks. For the non-deductible tIRAs I was only taxed on any earnings when I converted. We would own a lot less in Roth IRAs now if I didn't maximize non-deductible tIRAs over many years for the two of us.

My strategy was initially to pay taxes later, then it changed to pay taxes at a lower rate before delaying SS while converting tax deferred accounts to Roth accounts. In my case it wasn't a choice of non-deductible t-IRAs or not putting earnings into a 401k or taxable. Just my 2 cents and haven't had time to read most of the posts.
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by afr »

SGM wrote:I always maximized non-deductible tIRAs as well as maximized 401ks. For the non-deductible tIRAs I was only taxed on any earnings when I converted. We would own a lot less in Roth IRAs now if I didn't maximize non-deductible tIRAs over many years for the two of us.

My strategy was initially to pay taxes later, then it changed to pay taxes at a lower rate before delaying SS while converting tax deferred accounts to Roth accounts. In my case it wasn't a choice of non-deductible t-IRAs or not putting earnings into a 401k or taxable. Just my 2 cents and haven't had time to read most of the posts.
Thanks. For my wife and I it is a matter of choosing one over the other at least for the next 2-3 yrs. Most of those on this board that have given me constructive advice recommend discontinuing non-deductible TIRA contributions and limiting contributions to my 401k and joint taxable only, so that we can withdraw from joint account at 0-15% capital gains rate in retirement years.
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Epsilon Delta
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by Epsilon Delta »

There is an issue that has not been addressed.

Summerizing information from the thread (Please correct me if I've got it wrong)

You have a traditional IRA worth $71k and a basis of $39.5k
You're wife has a traditional IRA $53k worth and a basis of $26.5k.

You are 40 (and decades from retirement).
You are in the 33% tax bracket.

I'll look at your IRA. Similar arguments will apply to your wifes.

If you convert the IRA to a Roth now you will pay tax on $71k - $39.5k = $31.5k, at 33% that's $10.4k or 14.6% of the $71k. All future growth in the Roth will be tax free, and you will be able to do a back door Roth in later years.

If you wait to convert the Roth until you retire in 20 years and it doubles in that time then when you convert (or withdraw) you will pay tax on $142k - $39.5k = $103.5k. If you're future tax rate is more than 21% you'll be better off to convert now at 33% than to wait. The more future growth the more attractive converting now becomes.

So you should not just ignore the traditional IRA, you should look for an opportunity to do a Roth conversion soon. If you can foresee a low income year the next few years wait for that and then convert. If you have (or can foresee having in the next few years) an opportunity to roll the earnings in the IRA into a 401(k) or similar and convert just the basis do that. If you think you will just plug away in the same job in the 33% bracket for the next 20 years just bite the bullet and convert now, then do backdoor Roths. These considerations apply separately to you and your wife.
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by afr »

Epsilon Delta wrote:There is an issue that has not been addressed.

Summerizing information from the thread (Please correct me if I've got it wrong)

You have a traditional IRA worth $71k and a basis of $39.5k
You're wife has a traditional IRA $53k worth and a basis of $26.5k.

You are 40 (and decades from retirement).
You are in the 33% tax bracket.

I'll look at your IRA. Similar arguments will apply to your wifes.

If you convert the IRA to a Roth now you will pay tax on $71k - $39.5k = $31.5k, at 33% that's $10.4k or 14.6% of the $71k. All future growth in the Roth will be tax free, and you will be able to do a back door Roth in later years.

If you wait to convert the Roth until you retire in 20 years and it doubles in that time then when you convert (or withdraw) you will pay tax on $142k - $39.5k = $103.5k. If you're future tax rate is more than 21% you'll be better off to convert now at 33% than to wait. The more future growth the more attractive converting now becomes.

So you should not just ignore the traditional IRA, you should look for an opportunity to do a Roth conversion soon. If you can foresee a low income year the next few years wait for that and then convert. If you have (or can foresee having in the next few years) an opportunity to roll the earnings in the IRA into a 401(k) or similar and convert just the basis do that. If you think you will just plug away in the same job in the 33% bracket for the next 20 years just bite the bullet and convert now, then do backdoor Roths. These considerations apply separately to you and your wife.
I'm currently 56 yrs. old(wife is 52) and I plan on retiring in 11 more yrs. at 67. We are currently in the 33% tax bracket and will most likely be in the 15%(possibly but unlikely in the 25%) tax bracket in retirement yrs. We don't have the funds available to do a Roth conversion at the present time. I don't foresee any lower income in the coming yrs. I'm unable to do any conversions in my 401k., as its a pooled office account that I have no control over.
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Re: Taxable account or non-deductible tIRA?

Post by afr »

livesoft wrote:
afr wrote:... our joint taxable acct(dropping future contributions to the health care fund). Currently our joint taxable account consist of Vanguard total stock market index($46,900), limited term tax exempt fund(15,500), health care fund(9200),total int'l stock index(6900) and extended market index fund(3200). Would you still recommend doing a partial or full Roth conversion of our TIRA's when we retire?
Not only don't add any contributions to the health care fund, but also do not reinvest distributions in that fund.

As for Roth conversions in retirement, cross that bridge when you get to it.
Simple enough to discontinue future contributions to the health care fund, but how exactly do I discontinue reinvesting distributions in that fund?

Thanks,

Andy
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BL
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by BL »

How to change....

From My Accounts page (which is where I got to when I signed in, on the right is a list of services. Go down to MORE to get to HOLDING LEVEL DIVIDEND AND CAPITAL GAINS ELECTIONS. This allows you to make changes.
ACCOUNT MAINTENANCE
Dividends and capital gains
Address and phone
Banking instructions
Change of ownership
Required minimum distribution
User name and password
More
Account profile
Cost basis method
Holding level dividend and capital gains elections
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afr
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by afr »

BL wrote:How to change....

From My Accounts page (which is where I got to when I signed in, on the right is a list of services. Go down to MORE to get to HOLDING LEVEL DIVIDEND AND CAPITAL GAINS ELECTIONS. This allows you to make changes.
ACCOUNT MAINTENANCE
Dividends and capital gains
Address and phone
Banking instructions
Change of ownership
Required minimum distribution
User name and password
More
Account profile
Cost basis method
Holding level dividend and capital gains elections

So what will happen with the existing money in that fund?
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by afr »

bump...
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by afr »

afr wrote:
BL wrote:How to change....

From My Accounts page (which is where I got to when I signed in, on the right is a list of services. Go down to MORE to get to HOLDING LEVEL DIVIDEND AND CAPITAL GAINS ELECTIONS. This allows you to make changes.
ACCOUNT MAINTENANCE
Dividends and capital gains
Address and phone
Banking instructions
Change of ownership
Required minimum distribution
User name and password
More
Account profile
Cost basis method
Holding level dividend and capital gains elections

So what will happen with the existing money in that fund?

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livesoft
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by livesoft »

afr wrote:So what will happen with the existing money in that fund?
There should only be shares in that fund and no "money". If you mean, "What will happen to the existing shares in that fund?" then the answer is the same thing that happened all last week: The share price (NAV) will fluctuate.
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by afr »

BL wrote: Fri Aug 26, 2016 7:22 am How to change....

From My Accounts page (which is where I got to when I signed in, on the right is a list of services. Go down to MORE to get to HOLDING LEVEL DIVIDEND AND CAPITAL GAINS ELECTIONS. This allows you to make changes.
ACCOUNT MAINTENANCE
Dividends and capital gains
Address and phone
Banking instructions
Change of ownership
Required minimum distribution
User name and password
More
Account profile
Cost basis method
Holding level dividend and capital gains elections
The only choices that I'm given for both dividends and capital gains are either to reinvest, transfer to settlement fund, transfer to a bank account or send me a check.
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afr
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by afr »

afr wrote: Fri Jun 04, 2021 11:13 am
BL wrote: Fri Aug 26, 2016 7:22 am How to change....

From My Accounts page (which is where I got to when I signed in, on the right is a list of services. Go down to MORE to get to HOLDING LEVEL DIVIDEND AND CAPITAL GAINS ELECTIONS. This allows you to make changes.
ACCOUNT MAINTENANCE
Dividends and capital gains
Address and phone
Banking instructions
Change of ownership
Required minimum distribution
User name and password
More
Account profile
Cost basis method
Holding level dividend and capital gains elections
The only choices that I'm given for both dividends and capital gains are either to reinvest, transfer to settlement fund, transfer to a bank account or send me a check.
Would you all just recommend that I change my account setting to transfer both dividends and capital gains(within my holdings of Vanguard Health care fund in my joint taxable account) to my settlement fund? I'm just planning to keep adding to the Total Stock index in the taxable account. I thought it might be a good idea to exchange the STAR fund holding in our non-deductible TIRA accounts to a lower cost fund, preferably heavier in bonds? Not sure what though, but would like to minimize the tax hit as much as possible when converting to Roth IRA's when I retire.
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by afr »

Anyone?
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retiredjg
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by retiredjg »

It is difficult to know the nature of your questions without combing through the entire thread from 5 years ago.

If you have several things in taxable and only want to add more money to one of them...then yes you could transfer the dividends and cap gains from the other funds to the settlement fund. And then use that to buy more of the thing you want.
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afr
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by afr »

retiredjg wrote: Sun Jun 13, 2021 6:42 am It is difficult to know the nature of your questions without combing through the entire thread from 5 years ago.

If you have several things in taxable and only want to add more money to one of them...then yes you could transfer the dividends and cap gains from the other funds to the settlement fund. And then use that to buy more of the thing you want.
Thank you retiredjg for the reply. And I'm assuming that will not set off a taxable event? I also have a question regarding the STAR holding in our non-deductible TIRA's. Would it be wise to use the TIRA just to hold something like TIPS or short-term TIPS(and direct dividends/cap gains to the new fund)? That way the account won't grow too much and thus limiting the amount of pro-rata tax hit I take converting to my ROTH when I retire in 6 yrs.
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by livesoft »

afr wrote: Fri Jun 04, 2021 11:13 amThe only choices that I'm given for both dividends and capital gains are either to reinvest, transfer to settlement fund, transfer to a bank account or send me a check.
Have your distributions from the health care fund go to your settlement account. When the distributions from the health care fund are in the settlement account, then use all the money in the settlement account to buy more shares of the Vanguard Total US Stock Market Index fund that you already own in your taxable brokerage account.
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by retiredjg »

afr wrote: Sun Jun 13, 2021 9:30 am
retiredjg wrote: Sun Jun 13, 2021 6:42 am It is difficult to know the nature of your questions without combing through the entire thread from 5 years ago.

If you have several things in taxable and only want to add more money to one of them...then yes you could transfer the dividends and cap gains from the other funds to the settlement fund. And then use that to buy more of the thing you want.
Thank you retiredjg for the reply. And I'm assuming that will not set off a taxable event?
Putting the money into the settlement fund would not be a taxable event. I don't have a settlement fund and have never seen one used. I don't know if selling the settlement fund is a taxable event or not. However, if it is something like money market, it might be taxable but such a small event that it doesn't matter much.

I also have a question regarding the STAR holding in our non-deductible TIRA's. Would it be wise to use the TIRA just to hold something like TIPS or short-term TIPS(and direct dividends/cap gains to the new fund)? That way the account won't grow too much and thus limiting the amount of pro-rata tax hit I take converting to my ROTH when I retire in 6 yrs.
This question cannot be answered reliably because there is no context. But you are correct that holding only bonds in an IRA would be expected to reduce its growth compared to holding STAR fund there. But if you don't increase the stocks in some other part of your portfolio, your portfolio may also grow less.
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by retiredjg »

livesoft wrote: Sun Jun 13, 2021 9:35 am
afr wrote: Fri Jun 04, 2021 11:13 amThe only choices that I'm given for both dividends and capital gains are either to reinvest, transfer to settlement fund, transfer to a bank account or send me a check.
Have your distributions from the health care fund go to your settlement account. When the distributions from the health care fund are in the settlement account, then use all the money in the settlement account to buy more shares of the Vanguard Total US Stock Market Index fund that you already own in your taxable brokerage account.
Livesoft, is selling something in a settlement account a taxable event? Or is it some kind of special thing with no taxes?

Sorry, don't have one, never even seen one, and don't know how they work. I've always assumed it is something like a money market fund, but don't know that for sure.
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Re: Taxable account or non-deductible tIRA? [Discontinue nondeductible contributions?]

Post by lazynovice »

A settlement account is almost always in a money market account. Values don’t fluctuate and there is no taxable event for moving the money around. The taxable event is the receipt of the dividend and that occurs whether you direct it to the settlement account or reinvest it.
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