2008/2009 NonDeductible IRA Contribution Decisions

With the market in another funk this week, I was reminded that I had until April 15th to make my IRA contributions for 2008. It could get worse before then, or it might bounce up again, I have no predictive powers either way. I don’t like to be wishy-washy, so we went ahead and each invested $5,000 to a non-deductible IRA today.

A nondeductible IRA is the same as a Traditional IRA, except that your income is too high so you can’t deduct the contribution. If you haven’t maxed out all your other options like a deductible Traditional IRA, Roth IRA, 401(k), or 403(b) plan, you should put your money towards those first. This option is mostly for those with no other better options.

So if you don’t get the tax deduction, what’s the point? The most appealing is that in 2010, unless the law is changed, you can start rolling over your non-deductible IRA into a Roth IRA with no income restrictions. I am starting to like my chances, since we are only ten months away from 2010 (I plan to convert right away) and I’m sure with the current deficit the government would like to collect all the tax revenue it can now instead of later. If it looks good, I’ll probably make my 2009 contribution in December (after making sure we don’t otherwise qualify) and convert that to a Roth too.

The second reason is that the after-tax returns might be higher if you invested in tax-inefficient products like bonds, commodities, or REITs.

Contribution Limits
The contribution limits are $5,000 for both 2008 and 2009. If you are age 50 or older, you can contribute another $1,000 that year.

What Did I Buy?
My portfolio is getting out of whack right now, so I bought what I need to bring it back into my desired asset allocation. I purchased $3,000 of an REIT fund (VGSIX), $2,000 of a US Small Value fund (VISVX), and $5,000 of an Emerging Market fund (VEIEX). We’re still making regular contributions to our 401ks, which contain our US and International “Total Market” funds.

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