Is a separate IRA suggested for non-deductible contributions?

[Francis]

It has been suggested that I set up a separate IRA account for nondeductible IRA contrituions (Traditional IRA) to not mix deductible and nondeductible money. Is this a good idea or it is really not necessary because the 8606 takes care of the tracking? Any good reasons to set up a 2nd IRA for only nondeductible money? Thank you.

[Belgarath]

There are different schools of thought on this, and it comes down to personal preference. Assuming your account maintenance fees are low or non-existent, then it could create an ease of accounting 30 years down the road. But as you note, not necessary.

If you are eligible for a ROTH IRA, then I'd certainly recommend that you consider a ROTH over a non-deductible traditional IRA.

However, I'm a TPA and not a financial advisor, so please investigate further and don't take my word for it!

[masteff]

(Edit: this paragraph is apparently incorrect, see BPicker's post below): I think the idea some people have is that by having the deductible and nondeductible amounts segregated into different accounts, then you can control more precisely what portion of a distribution is taxable (by simply taking it from one account or the other). Since the IRA w/ nondeductible money is only taxable to the extent of earnings allocable to a distribution, then you could potentially have some periods w/ very little taxable income. Of course it depends on how much nondeductible money you really have.

And as Belgarath said, it might be worth looking at converting part or all to a Roth.

[Guest allancoleman]

I was very fortunate , Frank , that my main source of deferred money in my 401(k) for years kept excellent records for me of my before tax and after tax contributions . And when I rolled some of those funds to my IRA to be converted to Roths , only those funds that qualified went into my IRA and the portion of principal I had already paid taxes on was returned to me with a taxfree check . Possibly others might have to keep better records than I did .

The advice on taxfree Roths under current tax code is absolutely correct as I continue to convert more deferred account funds into Roths and really look forward to next tax year , 2008 , when I can run my Roth conversions straight from my 401(k) and skip this traditional rollover IRA phase that's necessary now .

[BPickerCPA]

It makes no difference if you put your non deductible IRAs into a separate account. At the time of withdrawal, all IRAs are combined on the 8606, so you cannot 'designate' your withdrawal as coming from only the non deductible account.

[masteff]

Then I stand corrected... added a note to my post above.

So that puts me w/ the original poster... aside from putting money in different IRA's to have access to different investment options, any good reasons to set up a 2nd IRA for only nondeductible money?

[John G]

I agree with the current "blend them all" aspect of IRA assets. Under the current rules, you don't need separate accounts - and that can be simpler, easier to track/manage and potentially involve fewer fees.

However, I can think of three reasons why you might want to keep the accounts separate: (1) because you don't want all your assets at one brokerage or mutual fund family, (2) you don't want to liquidate current investments, and (3) you are concerned about future rule changes. These are not likely to be factors for folks just getting started, but rather with households with substantial assets in retirement accounts.

It may help to have two points of access in a volatile market. On some of the recent crazy days, Schwab had systems lock up and Etrade had trouble with their bid/quote system. Seems like a pretty remote issue, but a few stock picking friends decided they needed to split their assets between a couple of brokerages. (Brokerages also differ in how they handle international stocks, which has recently become another bone of contention to folks buying individual stocks.)

Not every brokerage has the same coverage of mutual funds, so combining accounts might mean you need to sell some mutual funds.