Non-deductible IRA Contribution — Good or Bad Idea?
Revised By: Karen Rinehart, CFP®
The Henssler Financial Group Position Paper

The Hensler Financial Group Wealth ManagementIs a non-deductible Traditional IRA contribution a good or bad idea?

The answer to this question is maybe, and depends on your probable trading patterns and your asset mix. In years past, it made sense for most people to continue to make IRA contributions even if their income was too high to qualify for an IRA contribution deduction, but the tax law changes in 2003 muddied the waters of this question a little.

In 2008, singles with an Adjusted Gross Income (AGI) of less than $53,000 and couples filing jointly with AGI of less than $85,000 are eligible for IRA contribution deduction. Singles earning up to $63,000 and couples earning up to $85,000 are eligible for partial contribution deduction.

Before you make a decision you should consider the type of investor you are, and where most of your assets are, in making this decision.

If you are likely to buy a fund or stock and hold it for many, many years, you are probably better off avoiding an IRA and simply investing the money in a taxable account. With dividends and capital gains now both taxed at a maximum of 15%, this approach makes more sense. Whenever you eventually sell a stock or fund held in a taxable account, you will pay capital gains taxes on the gain.

If you are likely to trade the account regularly and make frequent changes to the stocks or bonds in the account, a non-deductible IRA contribution still makes sense. The IRA provides the benefit of avoiding taxes on frequently realized capital gains, and this benefit makes the IRA desirable, even if the contributions receive no tax benefits. This scenario holds the strongest argument to make the IRA contribution, as the savings over a long period of time can be substantial.

The other way to look at this question is to compare your retirement account assets to your taxable assets. If most of your assets are in taxable accounts, make the IRA contribution, so that if future tax laws benefit tax-deferred accounts more than today, you will have some assets that receive the benefits. If most of your assets are in retirement accounts such as 401(k) plans or IRA accounts, consider skipping the IRA contribution this year and add to taxable accounts instead.

Whether or not you make the IRA contribution, save the money and invest it someplace. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
 
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