Brokerage accounts are seen as relatively tax-inefficient, since you invest with post-tax dollars, and growth is taxed upon realizing gains. The traditional IRA allows you to deduct contributions and defer taxes until you take distributions in retirement ...
Unless you are covered by a retirement plan from work and make over
- $71,000/year if single, or
- $118,000/year if married filing jointly.
The numbers above come from a table published by the IRS for the 2015 tax year. Above those thresholds, you can still make contributions to a traditional IRA, but those contributions will be post-tax. Distributions are taxed as ordinary income, excluding post-tax principal.
Similarly, eligibility to make direct Roth IRA contributions phases out to zero according to a different table:
- $131,000 if single, or
- $193,000 if married filing jointly.
Looks to me that someone who cannot make direct Roth IRA contributions also cannot deduct traditional IRA deposits from income.
- investment period is 20 years,
- is some garden variety ETF (VTI/VXUS/etc),
- those investments return 5%,
- the current marginal tax rate is 28%,
- the expected marginal tax rate at retirement is 25%,
- the long term capital gains rate is 15%,
- the entity is not eligible to make Roth IRA contributions, and
- 401k contributions are already maxed out.
A $5000 of gross income contribution into a traditional IRA at retirement might grow to an after-tax sum of:
(5000) * (1 - 0.28) * (1 + (1.05 ** 20 - 1) * (1 - 0.25)) = $8064
Instead, since contributions were going to be taxed anyway, why not put it in a brokerage account? Then you could claim the favorable long-term capital gains rate.
(5000) * (1 - 0.28) * (1 + (1.05 ** 20 - 1) * (1 - 0.15)) = $8659
All I found was this question, and the accepted answer says to still make a traditional IRA contribution, but I still don't see why that would be a good idea. What am I missing here?