Traditional IRA I can't contribute to anymore

[Guest alrtx]

I have a tiny Traditional IRA (~$2k) with a Vanguard index fund. It's doing fine but I wasn't qualified to make contribution in 2005 due to my AGI. I just married someone with a good income and I don't see us falling below the joint $70k AGI anytime soon (and that would be financially distressing, so I doubt we'd contribute to the IRA).

My question: is this IRA pretty much stranded? I'm paying $20 a year in custodial fees, which equals about 5% of the growth. I pay$10 for an IRA under $5k and $10 for account under $10k. It will be years until my account goes above $5k if I can't contribute to it.

Should I just leave it or should I look into converting to a ROTH?

If I can't convert into a ROTH due to income restrictions, is there anything I can do?

Thanks!

[John G]

A couple of points:

I think you are confusing old/new, deductible-non, and IRA vs Roth income thresholds. The deductible income limit has bumped higher - 70-80 range. You need to look carefully at the tables in IRS publication 590 (starting on page 14 of the 2005 booklet) and determine which scenario applies to you. Besides married, there are issues of filing status, income, and participation in a "plan" at work. I suspect that you can contribute non-deductable amounts to this IRA. These limits/thesholds do change so you need to check each year to see what will apply to you.

Roth conversion income limit is 100k for 2006 for married filing jointly... but keep an eye on this limit as it may be removed in future years if current legislation holds.

Roth contributions - modified AGI is 150K, with phase out between 150-160K. This means you might also qualify for a contibutory Roth.

FEE ISSUE: Sometimes Fund families will waive the fees or minimize the charges if you just "ASK", but also if combined balances exceed a fixed amount (5-10k is common), or if you elect electronic (e-mail) statements, or commit to a monthly contribution program. That's a lot of choices for eliminating pesky fees. But, in the big scheme of things, that $10 is low to begin with and will look a lot lower as your account grows. Call your custodian - have a chat. They will certainly like to hook additional business from you now that you are moving into a higher income. Some funds will also let you pay the fee with a check each year so your IRA does not get dinged.

[Guest alrtx]

Thank you for the informative answer. You are probably correct about the fees being relatively small as it grows. But I have my 403b account with the same company, so it can't hurt to ask!

However, I do want to ask a follow-up question: I had always assumed a non-deductible IRA was a different creature. But from what I read just now, it sounds just like a Traditional in that the earnings grow tax-deferred (to be taxed upon withdrawal). And it sounds just like a Roth in that you contribute post-tax money. Is this the basic gyst, aside from details on age of access, etc?

If so, can I just contribute non-deductible money to the same IRA accont? Is it necessary to keep track of how much is deductible for purposes down the road or do I just concern myself each tax year with how much of that years contribution was deductible?

As a side note, we've definitely decided to max out our Roths first.

[txdd]

alrtx -

You are paying about 1% more expenses per year than you would if you had a larger account. That's not huge, but it is a significant drain on earnings. Off the top of my head, I see several ways out of this:

1. A custodian with no/lower fees or lower threshold. That's probably hard to find for a broker or fund company with wide investment choices. A bank or credit union would likely have no fee CD's and such available, but that really limits your options.

2. Move assets to Vanguard in taxable accounts to get above their combined account, no fee threshold. That might take more than you have available, but it's fairly painless.

3. Roth IRA conversion if you meet the $100k AGI limit and will have combined Roth assets to meet the size thresholds. I think that AGI limit disappears in 2010.

4. New traditional IRA contributions. Pretty much anyone under 70.5 with joint earned income can contribute to a trad IRA. Only the deductibility is income limited. If you make a non-deductible contribution, you file Form 8606 with your tax return to establish your after-tax "basis" in your IRA. When you withdraw money, part of the withdrawal will be tax free.

[John G]

Yes, you can contribute non-deductible amounts to an IRA that started as deductible. What you must keep seperate are [/u]contributions between you and your husband (I in IRA = individual!) and Roth contributions must put in a separate Roth account.

Yes, you must keep track of your deductable and non-deductable contributions. With your regular IRA, keep a file or three ring binder with contributions for each year. Some accountants include an IRA form each year so that you only look back 1 year for the accumulative contributions data. Note, over many decades, the contributory amount tends to be a smaller and smaller part of the total due to compound growth.

IRA vs ROTH - These are both related and very different. Roths have no tax on normal distributions. You can take Roth contributions out at any time without penalty. Roths have no required distribution schedule. Compare this with regular IRAs which have restrictions/penalties for early withdrawals, mandatory distributions, and get taxed at ordinary income rates.

[Guest TN_IRA]

Yes, you can contribute non-deductible amounts to an IRA that started as deductible. What you must keep seperate are [/u]contributions between you and your husband (I in IRA = individual!) and Roth contributions must put in a separate Roth account.

Yes, you must keep track of your deductable and non-deductable contributions. With your regular IRA, keep a file or three ring binder with contributions for each year. Some accountants include an IRA form each year so that you only look back 1 year for the accumulative contributions data. Note, over many decades, the contributory amount tends to be a smaller and smaller part of the total due to compound growth.

IRA vs ROTH - These are both related and very different. Roths have no tax on normal distributions. You can take Roth contributions out at any time without penalty. Roths have no required distribution schedule. Compare this with regular IRAs which have restrictions/penalties for early withdrawals, mandatory distributions, and get taxed at ordinary income rates.

I find that there are soooo many folks out there that don't realize that they can contribute to an IRA.

[Guest Rob-O]

We were just talking about this in the office this morning. Consider this situation:

A client is income-tested out of the ROTH. Instead makes non-deductible deduction each year to Trad IRA. In 2010, she will be able to convert that to a Roth. At that point she will have both underlying contributions and appreciation.

Question: What is taxable in that conversion?? Should she bother??

I think the underlying deductions are _not_ taxable as they were already taxed. But the appreciation is taxable as income. Anyone confirm or correct that??

Many thanks.

Rob-O

[John G]

Confirm 2010? That is not really possible. Given some of the odd changes for inheritance taxes and other programs like 529 sunsetting, I would expect a lot of new legislation before 2010.

Under todays rules.... you would pay tax on the gains but not the original after tax amounts converted. That is a very simplistic explaination - you don't get to cherry pick which part is converted. It is done on a prorata basis.