Contribute to Non-Deductible IRA or Post-Tax Brokerage? (Allen)
In the past, while working, I typically made too much salary to contribute to a Roth IRA, or get a deduction for a regular IRA contribution. Therefore, I made annual contributions to a non-deductible IRA, and I have been keeping track of the basis, so that I don’t pay taxes on the non-deductible contributions, when I decide to start taking withdrawals.
MY QUESTION – In general, does contributing to a non-deductible IRA make sense vs. post tax contribution to a brokerage account, given that the non-basis portion of the IRA will be taxed as income, when I take a distribution, vs. only paying long term capital gains on any money invested in a brokerage account? Seems like my income tax rate will be lower than capital gains rate, when I start withdrawing money from the IRA, but who knows where tax rates will be, in 15 years!!!!! I understand that our friends in DC are looking to increase capital gains rates to equal the income tax rates, which would make this a moot question.

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For those looking to invest their money for the long term, two options available are contributing to a non-deductible IRA or a post-tax brokerage account. These accounts are designed to help individuals grow their wealth and secure their financial futures. However, understanding the differences between these two options and determining which one is best for you can be challenging.

Non-Deductible IRA

A non-deductible IRA is a retirement savings account specifically designed for those who are not eligible to contribute to a traditional IRA. These individuals may earn too much income or already participate in an employer-sponsored retirement plan, which disqualifies them from making tax-deductible contributions to a traditional IRA.

Instead, they can contribute after-tax dollars to a non-deductible IRA and let that money grow tax-free. When it comes time to withdraw funds from the non-deductible IRA, only the earnings are taxed, and at a lower rate than ordinary income tax.

The benefits of contributing to a non-deductible IRA include the potential for tax-free growth, the ability to contribute up to $6,000 per year (or $7,000 if over 50), and the ability to diversify investment options.

Post-Tax Brokerage Account

A post-tax brokerage account is a more general investment account that allows individuals to buy and sell a wide range of securities, such as stocks, bonds, and mutual funds. This account is not tied to a retirement savings plan and does not provide the same tax benefits as an IRA.

Funds contributed to a post-tax brokerage account have already been taxed and will be taxed again when gains are realized. An advantage of a post-tax brokerage account is that there are no contribution limits, so those who have maxed out their IRA contributions can continue investing in this account.

Which Option is Best?

Determining the investment option that is best for an individual depends on their financial situation and goals. If the goal is to save money for retirement, a non-deductible IRA may be the way to go. However, if the individual desires more flexibility and does not need to save for retirement specifically, a post-tax brokerage account may be the better choice.

It is important to note that individuals can invest in both a non-deductible IRA and a post-tax brokerage account. This strategy can help diversify investments and provide more flexibility in investment options.

In conclusion, deciding between contributing to a non-deductible IRA or a post-tax brokerage account involves careful consideration of an individual’s financial goals and circumstances. Both options offer valuable benefits and should be explored to determine which one is right for you.