ASK KIM
When a Taxable Retirement Account is Best
by Kimberly Lankford

I don't qualify for a deductible IRA or a Roth IRA. Which would be a better alternative: a non-deductible IRA or a taxable account?

For retirement saving, we generally recommend investing at least enough in your 401(k) to get the full employer match, then maxing out your Roth IRA. If you earn too much to qualify for a Roth, then a deductible IRA is a good choice if you aren't covered by a retirement plan at work. But if you don't qualify for either option, then you'll usually do better with a taxable account than a non-deductible IRA.

Now that long-term capital gains rates are so low, you're paying too big a price for the tax deferral you'll get from the non-deductible IRA. You'll owe income taxes of as high as 35% on your earnings when you withdraw the money, rather than long-term capital-gains taxes of just 15% (or less) if you invested in a taxable account.

A taxable account also doesn't have some of the strings attached that the IRA does. You won't have to take required minimum distributions and your heirs won't owe income taxes on your earnings when you die.

But you'll need to be careful to minimize your annual tax bill. Because you will be taxed on sales, dividends and capital-gains distributions every year, it's best to buy and hold stocks or tax-efficient mutual funds in that account and leave high-turnover funds and stocks you trade frequently in any of your tax-advantaged accounts, such as a 401(k) or an IRA you already have.