Comments on: A Non-Deductible IRA Is Worth It For Me http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html like a friend telling you about money ... Thu, 19 Nov 2009 19:44:17 -0600 http://wordpress.org/?v=2.8 hourly 1 By: TFB http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html/comment-page-1#comment-2930 TFB Mon, 16 Nov 2009 18:13:28 +0000 http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html#comment-2930 Terry - I didn't follow Form 8606 that closely. Maybe you have until December 31, 2010 to rollover your pre-tax money. I just thought if you do it in 2009, it's super-clean. There's no ambiguity in how the conversion should be taxed. Rolling over to a company 401k or 403b would have the same effect. Terry – I didn't follow Form 8606 that closely. Maybe you have until December 31, 2010 to rollover your pre-tax money. I just thought if you do it in 2009, it's super-clean. There's no ambiguity in how the conversion should be taxed. Rolling over to a company 401k or 403b would have the same effect.

]]> By: Terry Tan http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html/comment-page-1#comment-2916 Terry Tan Fri, 13 Nov 2009 18:17:04 +0000 http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html#comment-2916 This is a great article just because not too many people talking about this Roth conversion strategy (roller over the pre-tax money in the traditional IRA into a solo 401K) to avoid paying income tax at the time of the conversion. Is there any reason to do this in 2009? Won't it be better to do this in 2010, right after you put in the 2010 after tax contribution of 5,000? Can I roll over my pre-tax contribution in Traditional IRA to my company's 403B? Doesn't this create the same effect? Thanks! TT This is a great article just because not too many people talking about this Roth conversion strategy (roller over the pre-tax money in the traditional IRA into a solo 401K) to avoid paying income tax at the time of the conversion.

Is there any reason to do this in 2009? Won't it be better to do this in 2010, right after you put in the 2010 after tax contribution of 5,000? Can I roll over my pre-tax contribution in Traditional IRA to my company's 403B? Doesn't this create the same effect? Thanks!

TT

]]> By: TFB http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html/comment-page-1#comment-2658 TFB Tue, 08 Sep 2009 01:14:26 +0000 http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html#comment-2658 Jason - (1) The cap is $5,000 per person per year ($6,000 if you are 50 or older). You also must have earned income of at least that amount. If you do 2009 and 2010 together in early 2010, that's $10k per person ($12k if you are over 50). Double that for a married couple. (2) 2010 looks to be safe now. The earliest conversion will happen in Jan. 2010. As far as I know there's no pending legislation to change the law. If they are not doing it now, I imagine they are not going to do it before Jan. 2010. Changing the law mid-year after some people already did it probably won't fly either. Beyond 2010, who knows? (3) A nonqualified deferred compensation program defers the taxes until you are paid from it in the future. It's as if you didn't earn the money until then. There is no AMT while you are deferring. Jason – (1) The cap is $5,000 per person per year ($6,000 if you are 50 or older). You also must have earned income of at least that amount. If you do 2009 and 2010 together in early 2010, that's $10k per person ($12k if you are over 50). Double that for a married couple.

(2) 2010 looks to be safe now. The earliest conversion will happen in Jan. 2010. As far as I know there's no pending legislation to change the law. If they are not doing it now, I imagine they are not going to do it before Jan. 2010. Changing the law mid-year after some people already did it probably won't fly either. Beyond 2010, who knows?

(3) A nonqualified deferred compensation program defers the taxes until you are paid from it in the future. It's as if you didn't earn the money until then. There is no AMT while you are deferring.

]]> By: Jason http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html/comment-page-1#comment-2657 Jason Tue, 08 Sep 2009 00:00:22 +0000 http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html#comment-2657 Sorry, threefold and this one is alittle bit off point but i hope you can help. 3. My employer offers a deferred salary program and is a fortune 100 company. This appears to be a slam dunk as it allows me to defer salary to avoid the taxes and also allows me to drive my AGI below the threshold needed for all other tax benefits. Does a deferred salary program allow you to completely hide from the tax burden or will I fall into an alternative minimum tax situation? Sorry, threefold and this one is alittle bit off point but i hope you can help.

3. My employer offers a deferred salary program and is a fortune 100 company. This appears to be a slam dunk as it allows me to defer salary to avoid the taxes and also allows me to drive my AGI below the threshold needed for all other tax benefits. Does a deferred salary program allow you to completely hide from the tax burden or will I fall into an alternative minimum tax situation?

]]> By: Jason http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html/comment-page-1#comment-2656 Jason Mon, 07 Sep 2009 23:49:14 +0000 http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html#comment-2656 Great article and thought process. I appreciate the tool giving me the ability to decide for myself what works best for me. I am going to be above the earnings restriction for Roth IRA contribution and am trying to find a way to take advantage of the tax benefits. My question is twofold: 1. Is there a cap to the amount I can contribute to a non-deductible IRA in preparation for the Roth rollover in 2010? I have $100K that I have earmarked for this move. 2. What would be the latest, in your opinion, that the conversion loophole could be closed and the move no longer be allowed? My thought is to hold off until April, move $100K into a non-deductible IRA, then immediately convert to a Roth, but I am concerned that the law will change after April. Great article and thought process. I appreciate the tool giving me the ability to decide for myself what works best for me. I am going to be above the earnings restriction for Roth IRA contribution and am trying to find a way to take advantage of the tax benefits. My question is twofold:
1. Is there a cap to the amount I can contribute to a non-deductible IRA in preparation for the Roth rollover in 2010? I have $100K that I have earmarked for this move.
2. What would be the latest, in your opinion, that the conversion loophole could be closed and the move no longer be allowed?

My thought is to hold off until April, move $100K into a non-deductible IRA, then immediately convert to a Roth, but I am concerned that the law will change after April.

]]> By: Bharat http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html/comment-page-1#comment-1559 Bharat Sat, 14 Feb 2009 17:14:30 +0000 http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html#comment-1559 TFB, Thanks for clarification on option to keep rollover IRA in a separate account. I am planning to keep the current 401K & if the new 401K offers better options than rollover into it. So that way, i will only have after tax contribution into the "non-deductible" IRA. TFB,

Thanks for clarification on option to keep rollover IRA in a separate account.

I am planning to keep the current 401K & if the new 401K offers better options than rollover into it. So that way, i will only have after tax contribution into the "non-deductible" IRA.

]]> By: TFB http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html/comment-page-1#comment-1558 TFB Sat, 14 Feb 2009 16:50:38 +0000 http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html#comment-1558 Bharat - When you rollover your 401k, you can ask for a new account or roll into your existing account. It's OK to mix non-deductible money with rollover money, but some prefer to keep them separate. Whether you mix them or keep them in separate IRAs, the implication for Roth conversion is the same. That's why I'm planning to move my pre-tax money to a solo 401k before I do Roth conversion. If you also want to do Roth conversion for your non-deductible money, perhaps you should consider postponing your 401k rollover or roll them into a 401k instead of an IRA. Bharat – When you rollover your 401k, you can ask for a new account or roll into your existing account. It's OK to mix non-deductible money with rollover money, but some prefer to keep them separate. Whether you mix them or keep them in separate IRAs, the implication for Roth conversion is the same. That's why I'm planning to move my pre-tax money to a solo 401k before I do Roth conversion. If you also want to do Roth conversion for your non-deductible money, perhaps you should consider postponing your 401k rollover or roll them into a 401k instead of an IRA.

]]> By: Bharat http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html/comment-page-1#comment-1555 Bharat Sat, 14 Feb 2009 15:09:16 +0000 http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html#comment-1555 TFB, A fellow boglehead! Great article. I have been contributing to "non-deductible" IRA with the expectations to move them into Roth IRA. But based on your argument about potential increase in dividend/cap gain taxes it seems that even without the Roth IRA option, "non-deductible" IRA make sense for me. I have one question about rollover IRA. If i move my money from 401K to Vanguard, will they create a separate account for rollover IRA or move the 401K amount into my existing "non-deductible" IRA? If there is no separate account for rollover amount then i guess, the only option is to open account with another fund company like Fidelity to keep all 401K rollover separate from "non-deductible". TFB,

A fellow boglehead!

Great article. I have been contributing to "non-deductible" IRA with the expectations to move them into Roth IRA. But based on your argument about potential increase in dividend/cap gain taxes it seems that even without the Roth IRA option, "non-deductible" IRA make sense for me.

I have one question about rollover IRA.

If i move my money from 401K to Vanguard, will they create a separate account for rollover IRA or move the 401K amount into my existing "non-deductible" IRA? If there is no separate account for rollover amount then i guess, the only option is to open account with another fund company like Fidelity to keep all 401K rollover separate from "non-deductible".

]]> By: TFB http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html/comment-page-1#comment-901 TFB Mon, 08 Sep 2008 00:26:22 +0000 http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html#comment-901 James - Establishing a solo 401k is primarily for providing a safe haven for the pre-tax money in the traditional IRA. They don't have to contribute $3 to the solo 401k because that's not the point. Just rolling over money from existing traditional IRA is good enough. Having earned $20 in self-employment income qualifies them for setting up a solo 401k. Otherwise they can't do it. Suppose they have 90% pre-tax money and 10% after-tax money in their traditional IRA. If they don't move their pre-tax money to a solo 401k or a workplace 401k, when they convert to Roth, they will pay income tax on 90% of the converted amount. If they protect the pre-tax money in a 401k, they will basically convert only the after-tax money in the IRA with very little tax due. If we are talking about only $20 of self-employment income, there is only one extra tax form (Schedule C-EZ). There won't be any self-employment income tax because the income is under $400. The form is very simple because it's got EZ in its name. The tax software will do it in a minute. James – Establishing a solo 401k is primarily for providing a safe haven for the pre-tax money in the traditional IRA. They don't have to contribute $3 to the solo 401k because that's not the point. Just rolling over money from existing traditional IRA is good enough. Having earned $20 in self-employment income qualifies them for setting up a solo 401k. Otherwise they can't do it. Suppose they have 90% pre-tax money and 10% after-tax money in their traditional IRA. If they don't move their pre-tax money to a solo 401k or a workplace 401k, when they convert to Roth, they will pay income tax on 90% of the converted amount. If they protect the pre-tax money in a 401k, they will basically convert only the after-tax money in the IRA with very little tax due.

If we are talking about only $20 of self-employment income, there is only one extra tax form (Schedule C-EZ). There won't be any self-employment income tax because the income is under $400. The form is very simple because it's got EZ in its name. The tax software will do it in a minute.

]]> By: James http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html/comment-page-1#comment-900 James Mon, 08 Sep 2008 00:04:09 +0000 http://thefinancebuff.com/2008/09/a-non-deductible-ira-is-worth-it-for-me.html#comment-900 TFB, I am interested in your comment about washing neighbor's car for $5. Suppose that someone made $20 (for the year) washing car, does that mean that they can contribute 15% of that $20 to a solo 401K? Is that worth the trouble since they have to file a self-employed income on the income tax? TFB, I am interested in your comment about washing neighbor's car for $5. Suppose that someone made $20 (for the year) washing car, does that mean that they can contribute 15% of that $20 to a solo 401K? Is that worth the trouble since they have to file a self-employed income on the income tax?

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