Taxes on traditional non deductable IRA vs. long term cap ga
This is the first year we (57/50 y/o) will make too much money for Roth IRA’s. If we go with the Traditional, non-deductable IRA, I was told profits would be taxed at the nomal income rate, while if we invested normally, we would be eligible for the lower long term capital gains tax rate (assuming assets were kept for more than a year). Is this true? If so, any easy way to figure out how long it would take to make the Traditional IRA a better deal?
Thanks for your thoughts/comments.
Permalink Submitted by Alan Spross on Thu, 2008-07-17 23:25
It is true that the very low LT cap gain rates did much to level the playing field between a non deductible TIRA contribution and just keeping the funds in taxable, but tax efficient investments that would provide some tax deferral and the LT rate when the income was realized.
The problem we have now is how long the qualified dividend and LT cap gain rates are going to be maintained at 15% max with the threat of higher cap gain and ordinary income rates in the near future. It is also undetermined at taxable income levels these rates would increase and by how much. So a useful analysis is highly problematic.
Of course, starting in 2010 you can convert to a Roth without any income limit, therefore you could make a non deductible TIRA contribution until then, file Form 8606 to report it, and then convert using the pro rate rules for taxation in 2010 or later. 2010 conversions also offer a two year tax deferral on the conversion done in 2010.
Back to your original question, I have seen studies that showed very little difference between the two choices you originally presented, with very small advantages in the taxable account for very high marginal rate taxpayers for combined state and federal. All of those studies assumed static tax rates, which we know is highly unlikely.