Is
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.
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