How to handle Non Deductible IRA
I have a clients that contributed to an IRA but his income was too high to allow him to deduct the contributions so he has a taxable base and has filed form 8606.
I assume ESPlanner treats the value of the IRA account as all tax deferred. How would you handles these taxable IRA contributions?
He could not contribute this to a Roth IRA because his income was too high. I suppose I could add the taxable value of the IRA to the Roth asset but this will misrepresent the situation. Is there any other way to handle it?
Bruce Galvin, CFP
Revelation Financial Planning
RSS
You'll need to add a special expenditure to handle the additional taxes.
Best,
Dick Munroe
We had the same problem this week. Dick, that seems like an awfully lot of work to figure out the taxes as the funds are taken out of the IRA (apportioning basis between the two) and hitting that year with a special to account for it. Is there a plan to improve the program to account for these?
Nope. As has often been stated, ESPlanner is not, specifically, a tax or retirement or estate calculator. ESPlanner is a simulator, a substantially different beast and one in which most times close is good enough. While we take a great deal of care in doing a wide variety of calculations (tax, social security, etc), there are some for which the incremental value isn't worth the effort and this specific issue, actually figuring out how much of the contribution is deductible is one of them. It's a question of "close enough" and for the purpose of simulation, the simplifying assumption that the user will do what's necessary to stay within the law makes our job a lot simpler.
FWIW you don't have to come up with an exact tax number for every year going forward, just a number that is a reasonable approximation of the additional tax burden and grow/shrink it appropriately. As long as your number isn't too low, you'll be getting good (if somewhat conservative) recommendations.
Best,
Dick Munroe