{"id":1114276,"date":"2019-05-03T19:10:41","date_gmt":"2019-05-03T19:10:41","guid":{"rendered":"https:\/\/dailyreckoning.com\/?p=107320"},"modified":"2019-05-03T19:10:41","modified_gmt":"2019-05-03T19:10:41","slug":"the-after-tax-contributions-you-should-be-making","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=1114276","title":{"rendered":"The After-Tax Contributions You Should Be Making"},"content":{"rendered":"

This post The After-Tax Contributions You Should Be Making<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n

The annual contribution limit to all of your traditional and Roth IRAs for 2019 is $6,000, or $7,000 if you\u2019re age 50 or older. <\/span><\/p>\n

Your traditional IRA contributions may be tax-deductible. The concept being that you deduct contributions during your high-tax-rate years, let them grow tax-deferred, and withdraw them when your tax rate is lower.<\/span><\/p>\n

However, the deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.<\/span><\/p>\n

The amount you can put into a Roth IRA has its own limitations, regardless of whether or not you have a qualified retirement plan… <\/span><\/p>\n

If you find that that you can\u2019t contribute to a traditional or Roth IRA, the IRS still lets you make after-tax contributions to a\u2026<\/span><\/p>\n

Non-Deductible IRA <\/b><\/span><\/h2>\n

A non-deductible IRA is very similar to a traditional IRA. The contribution limits are the same \u2026 $6,000, or $7,000 if you\u2019re age 50 or older. <\/span><\/p>\n

The big difference, as the name implies, is that you don\u2019t receive a tax deduction for the money you contribute.<\/span><\/p>\n

But the investments in the account grow tax-deferred until you withdraw them. Part of those withdrawals will be tax-free because they are a return of principal. The growth portion is fully taxable. <\/span><\/p>\n

How much to pay in taxes can be a little tricky… <\/span><\/p>\n

For example, suppose you contributed $7,000 a year to a non-deductible IRA for 15 years beginning at age 50, retire at age 65, and start taking distributions. At a 6% annual return, the account would be worth $163,000. <\/span><\/p>\n

You might think that you\u2019ll withdraw $5,000 and call it a tax-free return of principal. <\/span><\/p>\n

Sorry, you can\u2019t pick which dollars you take out.\u00a0<\/span><\/p>\n

The IRS requires that you add all <\/i>of your IRAs together when calculating the tax liability. <\/span><\/p>\n

Assuming the total value of your IRAs is $300,000 you would divide your basis, $105,000 ($7,000 x 15) by $300,000 and get a ratio of $105,000 \u00f7 $300,000 = 35%. <\/span><\/p>\n

So about 35% of your first withdraw will be a tax-free return of your contributions. In other words, take out $5,000 and you\u2019ll receive $1,750 tax-free with the balance ($3,250) fully taxable at your ordinary tax rate. <\/span><\/p>\n

However, no matter how much you earn you could use a backdoor Roth conversion to avoid future income taxes altogether.<\/span><\/p>\n

Here\u2019s how this strategy works: <\/span><\/p>\n

Soon after you fund a non-deductible IRA convert those funds to a Roth IRA where earnings grow tax-free rather than tax-deferred. Plus you won\u2019t have to bother with pesky required minimum distributions (RMDs). <\/span><\/p>\n

Additional Paperwork <\/b><\/span><\/h2>\n

Funding a non-deductible IRA is more than simply sending a check to the custodian. <\/span><\/p>\n

You\u2019ll have to: <\/span><\/p>\n