401k
401k Information

Nondeductible Ira

The current economic crisis is making everyone think about how to protect their money and the financial security of their family. Here are 45 tips to protect your money during and after an economic crisis. These tips have been taken from Surviving the Debt Crisis.

  1. If you wish to achieve real wealth, focus on acquiring assets that are valued by other people. Concentrate on allocating you money across different types of assets, including some whose value might rise where others that you have face a fall in their value.
  2. Decide whether you might be better off making extra mortgage payments or putting that money into investments.
  3. Be careful with investments; do not fall for flattery or let yourself be convinced by claims that their past performance is necessarily a true indicator of future prospects.
  4. If you get plenty of money, it is advisable that you invest the entire amount at once and not with intervals between. Diversify your investments as suggested in Point 1.
  5. Making big investments just to avoid taxes is a decision that requires careful consideration and access to premium, probably high-cost professional advice.
  6. If you plan to studying in college, compare the college saving plans to find those which give you the best options.
  7. Coins are alittle savingsa, so do not spend them. Try saving coins and use the paper currency; you will see that you have effortlessly saved more by the end of the month.
  8. Buy a house only when you are willing to move into it immediately and live for at least a minimum of five years.
  9. Instead of hiring young members of your own family or giving them a portion of your money when they are young, place your inheritance into a trust until your minors are sensible enough to handle the money.
  10. Supermarket coupons can be a great help, provided you know the right way of using them.
  11. Do not run after high returns without considering that ‘A great reward may have a greater risk’.
  12. Have you noticed people who buy lottery tickets each day? Buying more tickets does not significantly increase your chance of a major prize but inflates your risky investment significantly.
  13. Both parents working may seem to be necessary at the moment, but you may not think so if you calculate the extra expenses involved such as lunch, commuting, wardrobe, childcare, etc.
  14. Be careful which pension plan you opt for. Check that the agent is not selling you insurance instead of a pension.
  15. Check out your life insurance policy and whether it is a good investment. Remember, an insurance policy is to protect you and not just for the company and their agent to profit from you.
  16. Maintaining your investments through all cycles is the key to being invested in the right time. This may make your success rate higher rather than investing and then withdrawing from time to time because of the fees and other costs at each change.
  17. Avoid using a credit card as much as possible, because you end up spending extra with it. Instead, you can go for a charge card, which makes you pay what you spend each month.
  18. When you plan to buy a home, go for a buyer-broker. Realtors are the ones who represent the seller, unless you are hiring a buyer-broker who is the one who represents you.
  19. Investing the same amount regularly is said to be the best way of using dollar cost averaging.
  20. Instead of a fifteen-year mortgage plan, go for a thirty-year mortgage if the longer mortgage means lower monthly payments and a higher tax deduction.
  21. Consider applying for a systematic withdrawal plan rather than applying for bonds if this will provide a steady flow of income even after your retirement.
  22. Check that your bank accounts are insured federally. The FDIC, or the Federal Deposit Insurance Corporation protects deposits up to around two hundred fifty thousand dollars per person. If you have, more than the secured amount, you may spread it through various banks.
  23. If you want annuities, consider sticking to the variable and not the fixed type. A fixed annuity has a fixed return but a variable annuity gives you a chance to earn the full return.
  24. Grandparents often plan college funds for their grandchildren but, I believe that this requires very careful thought beforehand.
  25. Do not purchase a mutual fund just because it is highly rated. Different funds, even a mutual fund that has just a single star may do exceptionally well in certain periods.
  26. The money that you may need in the next two years must be cash or fairly easy to convert to cash. The stock market is not a place to store the money that you might need immediately.
  27. You can invest globally, not just in the U.S.A. exchanges.
  28. Keep a careful eye on your family budget; try to reduce your expenses, curtail your restaurant meals and other un-necessary expenses that may cause a future burden.
  29. When you want financial advice, only accept it from a registered investment advisor. A stockbroker is not the right person to advise you on your general finances.
  30. Write a check for yourself and save it first. This is an efficient, almost painless, way of saving.
  31. Do not include your child’s name is investments or bank accounts; this may mean that your other children might be disinherited and might cause tax problems.
  32. When you sell a home, go to a qualified realtor and get referrals from people you trust.
  33. Do not buy real estate investments with borrowed funds.
  34. Stopping your PMI when you have around 20% of the equity on your home left might save many hundreds of dollars.
  35. Buying mortgage life insurance should be considered carefully. Separate insurance might be a better option.
  36. If you contribute to a nondeductible IRA account is not a great idea, maintain a proper record or you may suffer serious losses.
  37. If you are 62 years of age now, you may be able to take a social security instead of waiting until you are 65.
  38. Money handling processes have changed, so do not stick to how your parents handled their money.
  39. While getting a pension, consider choosing a lump sum option where you can take control of your money and your future.
  40. While leasing the car, consider not paying for the cap cost reduction and perhaps get gap insurance instead.
  41. Saving money in your child’s name may not be a good idea. You will have to part with the money once your child turns 18 or 21.
  42. Instead of saving for your children’s college costs, consider starting to save for your own retirement first.
  43. Investing in a QTIP trust might be a good way of protecting your kids and spouse.
  44. Consider taking a policy that provides five or six years benefits instead of investing in long-term care insurance.
  45. Do not panic or worry; this will take you nowhere. It is not necessary that you take in all the gloom that the media throw at you.

Learn how to better protect you and your family in the current crisis, with this informative and easy to understand e-guide to Surviving the Debt Crisis.

Frequently Asked Questions

  1. QUESTION:
    Can I contribute to a nondeductible IRA for 2009 and then convert it to a Roth?
    I make too much money to deduct my traditional IRA contributions, and also too much to open a Roth IRA. However, from what I hear there’s no income limit for Roth conversions starting tax year 2009. Sounds to me like I could open a traditional IRA, pay taxes on my contributions, and then just convert it to a Roth for free (since I’ve already paid the taxes) and enjoy the tax advantages later on. Does this make sense, and is it legal?

    • ANSWER:
      Yuppers

  2. QUESTION:
    Should I convert my nondeductible IRA to a Roth when income limits are gone in 2010?
    I’ve always made too much to contribute to a ROTH, so I max out my 401(k) but only marginally put money in my nondeductible IRA. Should I max out the IRA this year so that I can convert it to a ROTH next year, knowing I have to pay taxes on the conversion?

    • ANSWER:

  3. QUESTION:
    Tax question: Rolling over nondeductible IRA to a ROTH?
    Does it make sense to roll over my non-deductible IRA into a Roth IRA?

    Would it be a good idea or not.

    I have about ,000 in nondeductible IRA (active) 0,000 in a SEP-IRA (“inactive” meaning not had any money put into it for years) and ,000 in a current 401K account (active).

    Thanks.

    • ANSWER:
      your non deductible is a Roth on which you had no tax advantage at contribution and will have none at distribution, why would you want to covert it to something that could be taxable to you later?
      and I believe the only thing you can do with the Sept and 401(K) is roll them into one similar account, or take distribution
      if you convert a reg IRA to a Roth, you will pay the taxes on it now and spread over the next few years
      again, why?

  4. QUESTION:
    any advantages in nondeductible IRA contributions vs putting $in the same portfolio/funds at a brokerage acct.
    If you couldn’t meet the eligibility for deductible contributions in trad. IRA or ROTH. what are the advantages of still putting money in an IRA as nondeductible contributions. What bothers me is the need to report this to the IRS via form 8606. Should I just put the money at my brokerage account. (I will be using the same funds in the portfolio)

    • ANSWER:
      First, an IRA and a brokerage account are not mutually exclusive. Your IRA can be in a brokerage account.

      The only advantage I can see in the IRA is that the gains and other income are not taxed until you withdraw the money. Depending on your age, that could be years from now. The disadvantage is that IRA capital gains are taxed at ordinary income rates when you withdraw the money. In your personal brokerage account, long-term capital gains are taxed at preferred rates.

  5. QUESTION:
    Can a nondeductible IRA be converted to a Roth IRA regardless of income, or participation in employer 401k?

    • ANSWER:
      conversions of any ira to a roth ira are dependent on income limits. the limit is based on “modified adjusted gross income” (magi) of 0,000 for single and married joint filers. participation in a 401k is not a restriction for conversion.

      in a nondeductible ira, the original nondeductible contribution will not taxed but any amount above the nondeductible contribution will be taxed.

  6. QUESTION:
    IRA’s – What are the pros and cons of investing in nondeductible IRA’s?
    Nearing 60.

    • ANSWER:
      The answer is based on asking yourself this question: What is your income tax bracket now, and what will it be when you retire?

      If your federal + state income tax bracket is around 30% right now, but you expect your income tax bracket to go down in retirement, let’s say to 15%, then it makes sense to go with deductible taxes now, save yourself the 30% in deductions, then pay the 15% tax rate on your retirement distributions and pay lower tax.

      Not knowing your financial situation, it’s tough to say for certain. But the general thought among financial planners is that for savers close to retirement, to stick with making contributions to deductible IRAs because the income tax rates for most people generally go down after they hit retirement.

      The folks that should really consider making nondeductible IRAs are people who expect their tax rate at retirement to go up. A second group that would consider nondeductible IRAs are people who have a couple of decades til retirement who are worried that the overall income tax rate will go up. By paying their taxes right now, they are insuring themselves against any increases in tax rates in the future.

  7. QUESTION:
    Can I liquidate a nondeductible IRA that I contributed 00 to in 2004 & filed IRS 8606 w/o incurring taxes?
    The IRA is now worth 20. I assume that because the original 00 contribution was taxed as income in 2004 (the Form 8606 was filed for informational purposes only), that the only taxes I will have to pay are on the earnings (i.e., the 0). I’m curious as to whether I will also be hit with any additional taxes or penalties. Thanks for all your help.

    • ANSWER:
      You are correct. You will only have to pay taxes on the earnings portion, however if you are under the age of 59 1/2, you will have to pay an additional 10% penalty on the 0.00. If you were over age 59 1/2, you will only be subject to income tax on the 0. Fill out IRS Form 5329 to pay for the 10% penalty. You may also have to pay State tax depending on what state you live in.

  8. QUESTION:
    Is a 401k rollover to a traditional IRA considered a nondeductible contribution (IRS Form 8606 f8606)?
    I recently rolled over my 401k from a former employer and a portion of the 401k was after tax. I am currently trying to complete form 8606, but am having a bit of trouble.

    Let’s just say I rolled over 0K pretax and K after tax into my traditional IRA. Would I fill out form 8606 like this?

    Line 1 – 100K for nondeductible contribution
    Line 2 – 20K as basis

    Is this correct?
    Will TD Ameritrade help me fill out this form?

    • ANSWER:
      I absolutely agree with Jason. You are rolling over a substantial amount with someone who should know how that is done and should be willing to help you out with that.

      And here’s a newsflash “happy” – Turbo tax is not going to tell you if you did it correctly.

  9. QUESTION:
    Does it make sense to roll over my non-deductible IRA into a Roth IRA?
    Would it be a good idea or not.

    I have about ,000 in nondeductible IRA (active) 0,000 in a SEP-IRA (“inactive” meaning not had any money put into it for years) and ,000 in a current 401K account (active).

    Thanks.

    • ANSWER:
      First, what is the value of the nondeductible IRA compared to the cost basis? If you have little gain in it, a conversion makes good sense.

      Second, if you have significant gain in it, what is your current tax bracket? If it is 15%, it might make sense to convert an amount equal to the remainder of the 15% bracket to a Roth. I wouldn’t do more than that unless you are going to have less income in 2011 and 2012 and want to spread the tax over those two years.

      Many companies will advise you on this for free. Try calling the people where you have the IRA account.

  10. QUESTION:
    when was the Individual retirement account tax saving plan first started?
    I am trying to calculate the “basis” of the nondeductible IRA account; and I think it started in 1976…….Thanks.

    • ANSWER:
      IRAs were created by the Employee Retirement Income Security Act of 1974 (ERISA) (Pub.L. 93-406, 88 Stat. 829, September 2, 1974)

      The traditional IRA has been in existence since 1975.

  11. QUESTION:
    A 42-year-old single taxpayer earning a salary of 5,000 a year can make which of the following IRA contribu?
    A 42-year-old single taxpayer earning a salary of 5,000 a year can make which of the following IRA contributions if he is not covered by a plan at work?
    a.,000 to either a traditional IRA, a Roth IRA, or a nondeductible IRA
    b.,500 to either a traditional IRA, a Roth IRA, or a nondeductible IRA
    c.,000 to a Roth IRA only
    d.,000 to either a traditional IRA or a nondeductible IRA, but no contribution is allowed to a Roth IRA

    • ANSWER:
      I found a calculator that might help.
      I got an answer that they cannot make any tax-deductible contributions.
      That doesn’t seem right to me.
      Smart Money . com calculator

      http://www.smartmoney.com/Personal-Finance/Taxes/What-Are-Your-IRA-Options-9563/

      /

  12. QUESTION:
    Is there a way to submit Form 8606 for previous years (2001-2003) via the internet to the IRS?
    This is the form for Nondeductible IRA contributions, and I made several back when I was a student, and the people who did my taxes didn’t do a good job…now I need to get it corrected or pay tax twice! Is there a way to do this online, so I don’t have to mail it and wait 3 months for it to get processed?

    • ANSWER:
      No, can’t do it online. However, you are in luck. IRS will accept a late 8606 even after the 3 year statute of limitations for a 1040X. You do not have to do a 1040X. Just file the 8606s.

  13. QUESTION:
    Form 8606 for nondeductible IRAs?
    can someone do an imaginary form 8606 as to how to fill the form from line 1 to line 16 for non deductible taxes?

    • ANSWER:

  14. QUESTION:
    Where does one file a Form 8606 form?
    Nondeductible IRA form.

    IRS HAS NO IDEA, called them up. Gotta love our tax dollars at work!
    jlf, i did.. no address. try not being so lazy and give google a quick try before answering, thanks.

    • ANSWER:
      Form 8606 is supposed to be sent to the same address as Form 1040. Download the instructions for Form 1040 (not the actual form, just the instructions) from http://www.irs.gov and look at the back cover (the last page of the PDF file) of the instructions for Form 1040. There is a long list of states with addresses. Send to the address listed for your state.

  15. QUESTION:
    Does the computation of tax in Roth Conversion include all 401K accounts?
    A person has a 100,000 IRA with ,000 nondeductible contributions and 0,000 in a 401K account. If the person converts the 0,000 IRA, in computing the nontaxable portion do you include the 0,000 in the total of the IRA? Thus, is the fraction 10,000/100,000 (IRA) or 10,000/
    200,000 (IRA and 401K)?

    • ANSWER:
      The 401k is not an issue, it is not an IRA, so ignore it.

      However, all IRA accounts do figure into the tax on the conversion, even if those accounts are not converted. If the 0K is all of the IRA accounts the taxpayer has, then upon conversion, K will not be taxed and the rest will be taxed.

      But, if the taxpayer had say another IRA account with 0K, then you would have to figure that K out of 0K or 5% is not taxed. Upon conversion of a 0K IRA, only 5K would not be taxed, and the rest will be taxed.

      All this is figured on Form 8606.

  16. QUESTION:
    Should I convert a traditional IRA to a Roth IRA?
    I have 4K in a Roth IRA. I opened the account and funded it one year, after that I was over the income restriction to contribute to it further. I then opened a Traditional IRA that I have sporadically added money to over the past 5 years. There is around 15K in it, all nondeductible funds since I also participate in an employee sponsored 401K. I am wondering if I should roll my funds from my traditional IRA to a Roth, now that the income restriction have been lifted for 2010? If I do this, is there is a chance that I will not be able to contribute to it further if the government changes the tax loophole? Is it worth it? I have approximately 35 years until retirement. Any advise is appreciated.
    In 2009 I was in the 28% bracket. This year it will be close between the 28% and the 33%

    • ANSWER:
      Depends on your present tax rate. Considering the amounts, you are probably in a very low tax bracket, thus the roll over will not substantially effect your present tax payments. Remember one thing, the Republicans are in charge now and there is a greater probability of future tax rates being lower. However, the present administration is spending like a drunk sailor (no intended insult to inebriated sailors) which would imply future tax rates higher.

      Your belief of higher or lower future tax rates should dictate your choice.

  17. QUESTION:
    My financial dilemma. Please give honest answer?
    I’m 53 years old medical professional making about 0,000 a year. My net worth not including my house is about .1 million. House is payed off, I’d estimate it’s worth is around 0,000. My car is payed off.

    I’m not married but take care of my 80 year old very healthy mom and 48 year old mildly mentally retarded brother who is also pretty healthy. They both have insurance for life through my dad’s military.

    At this time I’m putting in ,000 to my 401 plan and 21,000 to my 403 plan and ,000 to my nondeductible IRA.

    I can keep working way beyond 65 if I want to and my job is very secure.

    But I’m not very happy. I’d like to either retire or work only part time in about 6 years to take better care of my aging mom and my brother.

    Do you think I can either retire or slow down drastically without endangering my retirement, which may last up to 35 years?

    • ANSWER:
      You could absolutely retire in 6 years if you need ,000 a year in living expenses and inflation is 4% or less.

      You can NOT retire in 6 years if you need 0,000 a year in living expenses and inflation is 5%.

      My point is that you need to factor in how much you want a year to live on, in order to answer your question. But you can determine the answer by using the calculator I linked below, and try as many variations as you want. It will be useful for you to look at various scenarios so you can move forward confidently.

  18. QUESTION:
    Question about IRAs and taxes?
    My wife got laid off and closed her 401k and turned it into an IRA. Does that count as a contribution? It was over the ,000 limit so do we have to claim k as a deductible contribution and the rest as nondeductible or do we not count that at all?
    I should also mention we did receive a check for the 401k amount and mailed it to the IRA within the 60 days

    • ANSWER:

  19. QUESTION:
    When to file Tax Form 8606?
    I made a nondeductible contribution to my Traditional IRA on April 15th, 2008 for tax year 2007. My tax guy did not file a Form 8606. He says that for 2008, the IRS will send me some form showing my Traditional IRA contributions and then he’ll submit the Form 8606 for tax year 2008. ( I think he thinks this makes sense since I somehow technically made the contribution in calendar year 2008?) However, this does not make sense to me since the contribution was for tax year 2007. Can anyone tell me whether I need to file a Form 8606 with my 2007 taxes (obviously late) or with my 2008 taxes?

    Thanks.

    • ANSWER:
      If your accountant really said what you said he said, RUN as fast as you can to another accountant.

      You cannot report 2007 information on your 2008 return. Every year stands on its own with very few exception, none of which come into play here.

      You will get a form from the holder of your Trad IRA reporting to you your contributions for 2007 and you should have it very soon. But he didn’t need that document to file the 8606 – he could use your record of how much you contributed.

      Instead of just adding this to a different year – which would be stupid, inappropiate and illegal – you need to amend your 2007 return to add the 8606 to it.

      A little off the subject — why would you make non-deductible contribs to your IRA now that there are Roth IRAs? The Roth contributions are always nondeductible, but because of that you get some other pretty good advantages that Trad IRAs don’t give. The only reason to do what you did instead of getting a Roth is if you make to much to be allowed to contribute to a Roth – AGI over 4,000 if you are single or over 6,000 if you are married. If so, disregard this paragraph. Otherwise, talk to your financial advisor about Roth IRA and maybe even doing a conversion from Traditional to Roth.

  20. QUESTION:
    Where can I e-file if the IRS has a glitch and rejects all returns with error code 0448?
    If anyone else has had a rejected return i figured this info might help. This is not the tax sites error. . this is global for many of the companies like TaxBrain, TT, TaxAct, and most others. Here is the IRS notice:

    Subject: Individual Filers- Error Reject Code 0448 Auto forwarded by a Rule

    ATTN: Software Developers, Return Transmitters and Authorized IRS e-file
    Providers/EROs:
    We are experiencing a problem with Error Reject Code 0448 rejecting returns in error. The problem is being researched. When the problem has been corrected, we will issue another Quick Alert. Error Reject Code 0448 reads:
    Form 1040/1040A – If taxpayer age is 70 1/2 at the end of tax year and IRA Deduction of Form 1040 (SEQ 0700) and Form 1040A (SEQ 0626) is significant, taxpayer cannot deduct any contributions to traditional IRA or treat them as nondeductible contributions for they are ineligible for IRA Deduction.

    • ANSWER:
      Give it time, they will have the glitch fixed soon, if not already… There are too many millions of taxpayers that E-file for the system to stay down long….