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Retirement tax questions

With married filing separately and one spouse covered by a retirement plan, neither spouse can contribute to a deductible IRA or a Roth IRA.

As far as contributing non-deductible money to a traditional IRA, you're going to need to see a tax or investment advisor.  Contributing non-deductible money to a traditional IRA is, IMHO, unwise.  At best, it is basically the same as investing in a mutual fund through a stockbroker, except with more rules and paperwork and higher taxes on withdrawals.  The only advantage might be access to funds with lower commissions and cost ratios.

Now, I am not an expert, but for most middle class taxpayers it looks something like this

Deductible IRA: Tax-free deposits (saves 25% or more on income tax), withdrawals taxed at 25% (or less depending on your tax bracket in retirement), 10% early withdrawal penalty if you need the money early.

Roth IRA: fully taxed on deposit, withdrawals are tax-free. 10% penalty on early withdrawals of the gains but no penalty on withdrawing the principle.

Mutual fund (not a tax instrument): fully taxed on deposit, interest at 25% tax, gains at 15% tax, no penalties for early withdrawals.

Non-deductible traditional IRA: fully taxed on deposit, 25% tax on withdrawals (least savings/most tax), 10% penalty for early withdrawals.

In short, making non-deductible contributions to a traditional IRA makes your future tax returns more complicated, and ties up your money with the early withdrawal penalty without any offsetting benefits of tax savings either going in or coming out.  

If you are eligible for a 401(k) or a 403(b), you should make the maximum contribution you can.  My first recommendation is to close the Roth and pay income tax on the gains -- if you close it by April 18 you won't owe the 6% penalty this year.  Put the money in your checking account and then go to your HR department and maximize your 401(k) or 403(b).  Thats about $18,000 per year or $1500 per month.  Since that is pre-tax, your actual reduction of take-home pay will be around $1000-$1300 depending on your bracket and state taxes.  Make up the difference in take-home pay using the Roth money you put in the checking account.  If you have $12,000, that will be about 10 months.  Then go back to HR and drop your retirement contribution to what it was before.  The net effect will be to move the Roth money to your 403(b) or 401(k).   That's the only way I can see to get your money out of the Roth, stop paying the 6% penalty, and get the money into another tax-deferred retirement account.  (This will also lower your effective income for the next few months which may lower your other tax rates and lower your IBR next year.) (It will require discipline not to spend that lovely $12,000 on something unwise.)

If you don't like that idea, I would close the Roth, and put the $12,000 into a regular mutual fund.  You will owe some income tax each year on the dividends and capital gains, but it will be less than your current marginal rate (because the cap gains are taxed lower), and you will have access to the money any time instead of being tied up in a retirement account, and when you retire, you will only pay capital gains tax on the gains you pull from the mutual fund, with principle you pull being tax free since it was already taxed before being put in the fund.


@dmertz @TaxGuyBill am I wrong here?