Over at Bogleheads we came across the following discusison:
ROTH not available - What Tax Efficient Options are?
by Grt2bOutdoors » Tue Feb 03, 2015 10:34 am
This is based on my own future planning, not anything proposed so let's leave out any thing that is being reported in the news particularly the WSJ as I don't want this post to get locked.
What other options do I have from a tax-efficient perspective when saving for retirement if a ROTH (upfront or backdoor) and after-tax 401K converted to a Roth is not available to me? I can think of the following, any others have I missed?:
Traditional non-deductible IRA
After-tax broadly diversified total market index funds
I bonds
EE bonds
Now the dreaded and sometimes controversial "variable annuity".
529 plan
Have I left anything else out?
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Re: ROTH not available - What Tax Efficient Options are?
by House Blend » Tue Feb 03, 2015 11:07 am
Health savings account
If you count index funds, you should also count Muni bonds.
I would also count (individual) stocks that don't pay dividends.
I don't count Flex Spending Accounts. Yes, they are useful, but money has a very short lifetime in those accounts.
Also, Money Market Funds are extremely tax-efficient. If your marginal tax rate is 50%, the tax cost of using Prime MMF in taxable is half a basis point.
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Re: ROTH not available - What Tax Efficient Options are?
by itstoomuch » Tue Feb 03, 2015 12:37 pm
IMO, and you may not like this, YMMV,
Trading accounts are fairly efficient in that losses offset gains. You will have losses. LongTerm CG are better than ordinary income from IRA/401k.
Dividend companies on a B&H are very good. Divs have reduced taxation rate.
We have run thru your list. We have done some tIRA to Roth but is no longer efficient for us, at this time. We already have a portfolio in deferred annuities.
If you intend to trade in IRA brokerage account-MAKE MONEY.
If you intend to B&H and collect divs, Do so in a taxable account. And there are the Index's.
Other options: RE, MLPs but they are risky and tax confusing.
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Re: ROTH not available - What Tax Efficient Options are?
by dodecahedron » Tue Feb 03, 2015 12:45 pm
I am happy with TIAA Intelligent Life (a form of universal life). My (fully liquid) cash value is growing at 3.7%, tax-deferred. (If I hold the policy until my death, the entire death benefit, including the cash value accumulation, is tax free to my heirs.) I consider it part of my fixed income allocation and it is earmarked for LTC. If I should need LTC, the taxability of any withdrawals would be offset by medical deductions.
Not for everyone, but it works for me. No upfront sales load on the policy other than the state tax on life insurance premiums (which is fortunately low in my state) and no surrender charges at all.
Last edited by dodecahedron on Tue Feb 03, 2015 12:46 pm, edited 1 time in total.
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Re: ROTH not available - What Tax Efficient Options are?
by bigred77 » Tue Feb 03, 2015 12:46 pm
I would be interested in hearing the debate on Traditional Non-Deductable IRAs (that one does not have the option to convert to a Roth) vs using Index Funds in just a taxable brokerage account.
If I'm getting no tax break going in (for a non-deductable trad IRA), I assume I'm paying income taxes on my withdrawls of earnings only (do I understand this correctly)?
Would I not be better off using a brokerage account and paying taxes on yearly dividends and long term cap gains? Not to mention the opportunity to tax loss harvest?
As usual I assume this will depend on my anticipated tax brackets over time, especially in retirement. Its an interesting thought.
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Re: ROTH not available - What Tax Efficient Options are?
by itstoomuch » Tue Feb 03, 2015 1:29 pm
^ Yes.
but that is a qualified, Yes.
For high worth IRA and 401k, You may put your retirement in a relative high or higher marginal tax bracket, you may better off in a taxable. For some, trad401k and tradIRA are future tax traps.
For many young people who are fully funding their deferred space since their 20's and in fairly aggressive selections, their future withdrawals may be heavily taxed because they have so much growth in the investments. Rule of 72, rules along with the TaxCode. 
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Re: ROTH not available - What Tax Efficient Options are?
by grabiner » Tue Feb 03, 2015 6:43 pm
Since you say a Roth is not available but a non-deductible IRA is, I assume you have a large deductible IRA. Converting part of it to a Roth would increase your tax-deferred savings; this makes sense if you can convert up to the top of a bracket that is not much higher than your retirement bracket (28% if you expect to retire in a 25% bracket).
If you convert the whole IRA to a Roth, you can use the backdoor, and you can prepare for the backdoor by making non-deductible contributions to convert later. For example, if it will take four years to convert the whole IRA while staying in the 28% bracket, you can do this every year while making non-deductible contributions. These contributions will get converted along with the rest of the IRA, and won't add much to the amount taxed. Once the whole IRA is converted, you have the backdoor available.
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Re: ROTH not available - What Tax Efficient Options are?
by grabiner » Tue Feb 03, 2015 6:46 pm
bigred77 wrote:I would be interested in hearing the debate on Traditional Non-Deductable IRAs (that one does not have the option to convert to a Roth) vs using Index Funds in just a taxable brokerage account.
The non-deductible IRA is likely to be inferior to a stock index fund. Most of the taxes on the stock index fund are deferred anyway, and the taxes that you do pay are at a lower rate in a taxable account. If you retire in a 15% bracket, you will pay only 15% tax on gains in the IRA, but you will pay no tax on gains in the stock index fund as long as the dividends are qualified.
The non-deductible IRA should be superior to a bond fund, unless you retire in a very high tax bracket. Taxes on taxable bonds are the same in a taxable account and a non-deductible IRA, and the IRA gives you the benefit of deferral. If you are in a very high tax bracket, the effective tax rate on holding muni bonds in taxable is lower than your tax bracket, as it is the difference between yields on corporate and muni bonds of comparable risk, likely about 25%.
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