NetNews Usenet Archive 1992 #31/NN_1992_31.iso/spool/misc/invest/15465

Text File | 1992-12-29 | 2.9 KB | 56 lines

Path: sparky!uunet!rayssd!galaxia!animato!rlcarr
From: [e-mail] (Rich Carreiro)
Newsgroups: misc.invest
Subject: Re: What good is a non-deductible IRA?
Distribution: usa
Message-ID: <[e-mail]>
References: <[e-mail]> <[e-mail]>
X-NewsSoftware: GRn 1.16f (10.17.92) by Mike Schwartz & Michael B. Smith
Date: 29 Dec 92 00:51:55 EST
Organization: The Other Side of Life
Lines: 43

In article <[e-mail]> [e-mail] (Bill "Bill" Tuthill) writes:
> Is is my view that non-deductible IRAs are nearly worthless.  Since you
> get charged a 10% penalty for early withdrawal, the money is basically
> stuck there until you reach the age of 59╜.  Moreover, you never know
> when Congress is going to change the tax law.  Why I'm so old I remember
> the days before a 10% penalty!

True.  However, assume you can invest and get an overall 8% return.
Also assume that you are in the 33% bracket.  So your marginal rate
is at least 33%, maybe higher depending on state/city.  So, that means
your aftertax return is only 5.36%.  An example...
$1000 invested for 15 years at 8% = $3320 for $2320 in earnings
$1000 invested for 15 years at 5.36% = $2234 for $1234 in earnings.

Now tax away 43% (33% + 10% penalty) of $2320 = .57(2320) = $1322 after taxes
on the IRA distribution.  So even with the penalty, you come out better after
15 years.  If you can afford to leave the money in even longer, you do even
better.  After all, e^(.08*t) is always e^(0.0264*t) larger than e^(0.0536*t).
Eventually that difference will more than make up for the 10% penalty.  And
if you can make it to 59.5 years, that 10% penalty goes away.  Now, granted
this assumes that the rules stay basically the same, of where there is no
guarantee, but it is definitely false to say that non-deductible IRAs are
worthless on the face of it.

> If you have access to one, a 401(k) or 403(b) is superior because they
> are fully deductible, have higher maximums and no salary cap, and often
> provide loan provisions.  If you are self-employed, a Keogh is better
> because it is fully deductible.

These are all definitely superior (though of course CONgress can always
change the rules to screw you over) -- especially 401(k)'s where the company
has matching contributions of some sort.  However, note that some 401(k)'s
may well offer very limited investment choices, whereas an IRA can be invested
in just about anything the owner wants (except for collectibles, real estate,
etc.).  A person may have very valid and reasonable reasons to use a
non-deductible IRA, though of course he's almost always better off putting
money into the 401(k) first, especially at least enough to draw the maximum
amount of matching funds from the employer.

--
Rich Carreiro                                  Home: [phone]
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