Should I invest in Non Deductible IRA - HELP!

[Guest APOPOO]

I am 28 years and I currently have $16,000 in my 401k, and I am contributing enough to get my company matching funds, which in total will add another $3500 this year. I recently convinced my wife that we should both open ROTH IRAs. We've been contributing into our individual ROTH IRAs for about 5 months. Then I came to the realization that our AGI for 2006 will exceed $150,000.

So rather than continue to contribute to the ROTH IRA knowing that we can only contribute for 2005, i want to re-characterize the ROTH into a taxable account or non deductible IRA before april 15th since I hate to have just $4000 sitting in a ROTH IRA. It seems like a waste of effort to only contribute $4000.

I am currently investing in T. ROWE price retirement 2040 in my IRA. Would it be wise to move this into a taxable account? Will that be tax efficient? Or should I just focus on maximizing my 401k and forget about all these other accounts? Please help.

thank you

[Bird]

I would leave the Roth money alone. Maybe it's not a huge amount but I don't think it's so hard to to just let it sit. (It's not clear to me whether you have 2006 money in there already that needs to be fixed somehow.)

For additional savings, I'd just open a regular account and start shoveling money in. You'll pay some current taxes on dividends and capital gains, but only at 15%. It's nice to have that accessible money in additional to the 401(k) and/or IRA stuff.

[Guest APOPOO]

thanks Bird. Regarding the taxable account, do you think the T. Rowe Price retirement 2040 fund would be tax efficient?

[John G]

If you qualified for Roths in 2005, why not max them out for that year. I also am assuming that the contributions you have talked about are not for 2006. Then I would recommend that you find two good stock funds with a bias towards growth. Since these two accounts are a modest part of your entire investment package, you could take a more aggressive position on where the funds are invested. With a slight growth bias, these funds could grow to about 250K by the time you are 68. That's 250k x 2 or 1/2 million.

So, I recommend you plant those two acorns for 2005.

For subsequent years, maxing out the 401K match should be a high priority.

As Bird has recommended, you might want to use a discount brokerage account for other investments. For example, you could place these funds into a tax managed index mutual fund. This approach limits your exposure on a year to year basis for interest, dividends and capital gains... which sort of mimics the tax shelter status of an IRA. The problem with standard IRAs is that distributions are eventually taxed as ordinary income... which is generally the highest tax rates.

Age 28, making over 150k! Good for you. If one of you stops working, perhaps you will again qualify for a Roth. It looks like you have a bright financial future, so......

I highly recommend that you start a reading program about wealth management for you and your spouse. There are many issues to consider - possible college accounts when you have children, other tax shelter opportunities if you are self employed or own a small business, tax free bonds, home ownership, life insurance, wills, etc. Developing expertise in wealth management is a joint job, make sure you wife participates. For example, three hours a month reading two financial magazines (like Money and Kiplinger Financial) would be a good start for the first two years.

[Guest APOPOO]

Thank you John. We currently suscribe to Smart Money but I have heard good things about Kiplinger.

[John G]

All of the financial mags have an element of self promotion. Plus they all tell you about great investment ideas about a year late.

I like Kiplinger because it covers home buying, credit issues, taxes, retirement accounts and some general investing. You have to read all of these with a well tuned filter.