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Is it worth starting a traditional IRA if I can't contribute to a Roth IRA?

My modified AGI is above 122k so I can't contribute to a Roth IRA. My work has a 401k plan available, but it does not match, so I have not contributed to it. Instead, I have been paying off debts; everything except my mortgage should be paid off this year.

Is it worth starting a traditional IRA and funding 5k for the 2011 tax season? I'm not sure if my income later in life will be higher or lower (potentially retire before I start to take from IRA), so it's hard to say if paying tax now or later is better. Are there other reasons to contribute? I've also heard about contributing to a traditional IRA and converting it to Roth to get around income restrictions, but I don't know if that's worthwhile.

If I did contribute to a traditional IRA for 2011, would it be better for 2012 to contribute to a non-matching 401k plan instead, or is it situational based on the plans themselves?

Jan 20, 2012 by Robert from San Diego, CA in  |  Flag
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3 votes
Jim Blankenship Level 17


If you do go ahead and contribute non-deductible funds to a traditional IRA, you may as well go ahead and convert them to Roth IRA shortly after. This is a perfectly legal maneuver, and by doing so you're trading future taxation of any growth in the traditional IRA for tax-free growth in the Roth account.

Comment   |  Flag   |  Jan 24, 2012 from New Berlin, IL

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Robert, Lets not lose the forrest for the trees. What's important is that you are investing for the future. If you invest 6-10% of your income in a diversified portfolio ( mostly equities) and keep doing it, your future self will wake up one day financially secure! I Can't say that the choice between 401-k, Trad IRA, Roth IRA makes much of a diffrence! - As you noted, it depends on future tax rates, order of returns, your income later in life- unknowable items. Personally, I am splitting my savings between pret- tax and post- tax about 50/50 hedging on what the future might hold. But again the key is to invest regularly and keep doing it. Your on your way!! Best of luck, Evan

Comment   |  Flag   |  Jan 21, 2012 from Port Washington, NY

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Robert, does your 401k have a Roth option? If so, that would be a strong consideration, even if your company does not match. If you are a diligent saver, the likelihood of retiring in a lower tax bracket is very small, so any Roth savings would be advantageous. If you can convert part or all of an existing IRA to a Roth, you should at least consider doing so in order to get a Roth in place. Paying off debt is ALWAYS smart, especially for higher interest rate debt. Your mortgage deduction may not be worth as much as you think; how much do your itemized deductions exceed the standard deduction? Finally, don't let the tax-tail wave the dog; saving and investing will benefit you, regardless of the taxes.

Comment   |  Flag   |  Jan 24, 2012 from Arvada, CO

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Robert- With rare exceptions depending on your personal circumstances, if you are saving the funds anyway, you should max out both your 401k contributions (ROTH if available) and your IRA contributions. The reason is simple: tax-exempt savings are better than tax-deferred savings, which are better than taxable savings, especially if you anticipate a long holding period and future marginal tax rate that is not substantially higher than your current rate. The non-deductible IRA is a no-brainer. As Jim Blankenship rightly points out, you can contribute for 2011 and 2012 today, immediately convert to ROTH, and have no tax liability (assuming you do not already have an IRA). If you do not need the funds, there is no downside. I typically advise clients on asset location in addition to asset allocation: put the high risk / high expected return assets in your ROTH to maximize the long-term effect of tax-free compounding. Best of luck!

Comment   |  Flag   |  Jan 29, 2012 from San Francisco, CA

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