What retirement account options exist when IRA income limits are excee

[Guest]

I recently switched jobs and am not eligible for participation in my company's 401(k) until 1/1/02. I expect I'll leave my money in my former company's 401(k) until then. However, in the meantime I'm interested in making contributions to a Roth IRA. I'm married filing jointly, my spouse doesn't work and my income exceeds the $160k annual limit. Am I still able to participate in a Roth IRA, or even a conventional IRA? I really don't want to wait a year and a half to make retirement contributions.

[Guest Paul Vickers]

Since your AGI exceeds $ 160,000, you are not eligible for a Roth contribution. If you have not received any allocation in any qualified plan in 2000, you may make a deductible contribution to a traditional IRA. If you have, the only option left is a non deductoble IRA (not recommended). Remember, allocation includes any salary deferrals.

As an alternative, if you are able to construct any self employment income, you could do something like a SEP based thereon.

[Guest]

Thanks for the information. Unfortunately, I did participate in and had salary deferals in a qualified plan earlier this year. I'm not self employed so your other suggestion isn't possible. Why is a non-deductible IRA not recommended?

[Guest Paul Vickers]

A non deductible IRA creates additional paperwork (Form 8606 required); it also complicates IRA withdrawaks in the future. The same benefits (current tax deferral) can be obtained in other ways.

Since you will not join the new 401(k) plan until 1/1/02, you will be eligible to make a deductible IRA contribution in 2001.

[QDROphile]

I think you may find disagreement about the value of a nondeductible IRA and the comparability of alternative tax deferral options. Not a fan or student of insurance products, I can't say. But can say that a nondeductible IRA is not that much trouble. Perhaps not worth it if you have insignificant nondeductible contributions over the years.

[Guest Paul Leslie]

The point Paul was trying to make is that the form 8606 has to be filed and the D Miller will always have to keep track of that $2,000 contribution. So when he takes out money from his IRAs he will have to do some special calculations not the worse thing in the world but there is extra work. No one is going to keep track of that except D Miller. So don't rely on the IRA trustee to keep track. The IRA doesn't care if it is deductiable or nondeductiable IRA contribution. That is between the IRA owner and the IRS as to whether or not the contribution is deductiable.

Annuities do have there place. It maybe an option if the situation is right.

Since the time frame is only year and half before he will start investing back in the 401(k), I would suggest investing either directly in a stock or tax efficient mutual fund like an index fund. It's not deductiable but the income they generate would be minimal plus the money is there when ever he needs it. Plus it is much easier method then annuties and nondeductiable IRAs. Most of the return would come from the capital appreciation of the stock or mutual fund, which would also get capital gain treatment when you decide to sell the inverstment vs. ordinay income treatment in a non deductiable IRA or annuties. Of course there is always the risk of losing money but at least you take a capital loss on the stock or fund, which does not happen with money inside an IRA or pension plan.