Source
r/investing•
Aea

Should I contribute to a Non-Deductible Traditional IRA or a Brokerage Account?

Context: I am above the Traditional IRA deduction limit and the Roth IRA income limit. I am maxing out my 401K.

The immediate thought is doing a Backdoor Roth IRA and... I got myself into a bit of a pickle here. About a year ago I rolled over an old 401K into a Groundfloor (Peer-to-Peer Lending) Traditional IRA and I'm in the process of transferring most of the cash over to an Traditional IRA on Fidelity.

However... I have have $5K left in the Groundfloor "LROs" and all but $450 are non-performing or in default.

If I understand correctly if I want to do a Backdoor IRA the "pro rata" rule applies and I'll need to calculate pre-tax and post-tax allocations. This also means I'll be paying tax on $4.5K of money that I'm probably never going to see again. This feels like a bad idea.

So until those losses are reflected on the Groundfloor IRA I see myself having two options:

  • Contribute to a Traditional IRA and don't take a deduction, or
  • Contribute to a Brokerage Account

I'm strongly leaning towards the latter as I feel it gives me flexibility while not losing too much of a tax advantage.

I've also learned my lesson and will not be ducking around with novel investments in retirement accounts without consulting a professional in the future.

Posted Sep 25, 2023, 8:37 PM UTC

19
cdude•

Make the non-deductible contribution and keep it there until your other investment losses are realized. Then your Traditional IRA would have mostly non-deductible contributions, may be some earnings on that amount. Then simply complete the backdoor process by converting everything. That would still better than a taxable account by far.

1
StatisticalMan•

The only reason to make a nondeductible tIRA contribution (after-tax) is as part of a backdoor Roth strategy.

After-tax is absolutely terrible from a tax standpoint. If not doing a backdoor roth then yes a taxable brokerage account is better.

1
AeaOP•

I'm not sure if there's a way I can take the losses, GF alleges that their average loss rate is 1% yet I'm batting an order of magnitude more than that number (I diversified using their investment automation and into relatively well-rated loans).

I'm unsure if this will play out in time or if there's actual macro forces making repayment unlikely.

I realize in retrospect that doing an IRA with these wasn't the smartest move.

1
Alien8w8•

Make the 6k contribution into your traditional, document it, but don't deduct it. Then convert it to a Roth. Repeat each year.

1
GaylrdFocker•

Do you have a 401k where you currently work? After you move the IRA to Fidelity you may be able to roll it into your 401k, depends on your company though.

..alternatively..

If you convert the Trad IRA to Roth you pay taxes on that now, but you avoid paying taxes on the maxed Roth IRA for the rest of your working career. Figure out if this is worth more than investing in a taxable account or not.

1
AeaOP•

What's the advantage of rolling it into my 401K?

1
debbiewith2•

There’s no pro rata

1
GaylrdFocker•

Would allow you to do the Backdoor Roth IRA because you no longer have a Traditional IRA balance.

1
AeaOP•

But I'd still be left with the tIRA balance on Groundfloor that's illiquid.

1
GaylrdFocker•

Then you need to find a way to get out of that and move it elsewhere. That was a terrible investment idea and you shouldn't leave it there even if you have to get a lawyer involved.

1
Smaddid3•

My suggestion - put it in a non-deductible traditional IRA - for two reasons. 1). The investment gains will grow and compound tax free until you are required to take distributions. Then they will be taxed at what may be a lower tax rate in retirement. 2). The IRS allows you to track non-deductible IRA contributions on your tax forms each year. You will not be taxed on these contributions when they are withdrawn because they were already taxed when they were initially contributed.

1
USTS2020•

I'd check if you 401k allows for after tax contributions on to of your annual max and that you can convert those amounts to Roth and potentially roll out to a Roth IRA

1