Would I want to contribute to a Traditional IRA if I am ineligible for a Roth IRA due to the level of income?

Question

I know that the Roth is only for incomes under 150,000.
I thought there was an income cap on a traditional IRA but I'm not sure.
What is the advantage of contributing to a traditional if I earn over 150,000?
Is there a better way to be investing dollars at that point?

Answer 1

You did not mention whether you are covered by an employer provided plan? If you are, then you may not contribute to a traditional IRA. If you are not, then you can. Read IRS publication 590 for the complete scoop.

http://www.irs.gov/pub/irs-pdf/p590.pdf

There are disadvantages to contributing to a traditional IRA. Two important ones: 1. you eventually will have to pay taxes on the amount withdrawn at the full tax rate. 2. If over the years you accumulate a lot of money into your IRA, the tax rate you might have to pay could be very high.

There might very well be a better way. Consider investing in a broad range of equities, either directly or through some tax advantaged means (not mutual funds too subject to year end realized gains) Index funds would be a good choice since they do not have much in the way of realized gains, most don't. Or sound investment grade stocks in which you invest but do not sell. With both scenarios you capital will accumulate tax deferred until you do have to sell and then when you do sell, your gains will be taxed at a preferable tax rate, unlike a traditional IRA.

Answer 2

If your company has a 401k plan and you can contribute the max ($15,500), do it...especially if the company matches a certain percentage. If you can contribute more than that in one year, put $4000 in a traditional IRA. Your income level leaves you ineligible for the Roth but you can make a non-deductible contribution to the traditional.

This gives you a little flexibility in withdrawals when it comes time to do so. Since your contributions to the IRA are non-deductible, you only need to pay taxes on the growth. This will allow you to enjoy tax deferral in your 401k for a longer period of time. You will more than likely be in a lower tax bracket in retirement. This means that you will pay less taxes on the money you are socking away today.

Answer 3

Tax deferred growth is always good. I assume you don't have an option for a 401(k) through an employer. If you are self employed you can start your own "pension" plan by the use of several tax qualified programs. The Simple IRA is quite good, and you can defer up to $30,000 per year. So yes, look into an IRA.