 Saving
when you expect to be rich
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 Dear
Dr. Don,
I am a recent grad from a top 10 undergraduate business school with
two bachelor's degrees. I was planning on opening a Roth IRA immediately
after graduating, but frankly I expect to be making more than the
$95,000 limit to contribute to a Roth.
In addition, my firm does not offer a 401(k) plan. Since it doesn't
make sense for me to make just two or three contributions to the
Roth before reaching the income limit, what type of account should
I open to fund my retirement?
-- Joseph Jumpstart
 Dear
Joseph,
I'll guess that one of those majors wasn't finance. Being able to
put $4,000 in a Roth IRA this year, assuming an 8 percent annual
return, is worth about $87,000 tax-free 40 years from now. That's
what is so great about finding a way to put some money aside in
your 20s for retirement. (I'm assuming you're in your 20s.)
Although I'm not recommending it, you always have
the ability to contribute to a traditional IRA using after-tax dollars.
Here's what IRS Publication
590 Individual Retirement Arrangements has to say on the topic:
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Although your deduction for IRA contributions may
be reduced or eliminated, contributions can be made to your IRA
of up to the general limit or, if it applies, the spousal IRA limit.
The difference between your total permitted contributions and your
IRA deduction, if any, is your nondeductible contribution.
While you're contributing after-tax dollars, you're
deferring taxation on the investment income until you take distributions
from the account. IRS Form
8606 has to be filed for nondeductible contributions.
You could also consider variable annuities as a tax-deferred
approach to retirement savings, but again I'm not recommending this
approach. The Securities and Exchange Commission guide
is a nice overview to the topic.
What approach am I recommending? I think you should
invest in a Roth IRA up to the limits of account and then set money
aside in taxable accounts for long-term savings. By actively managing
the tax impact of how you invest, you can invest for retirement
and pay 15 percent on qualified dividend income and 15 percent on
long-term capital gains rather than ordinary income rates on tax-deferred
investments. (These rates aren't applicable to all taxpayers)
To ask a question of Dr. Don, go
to the "Ask the Experts"
page, and select one of these topics: "financing a home,"
"saving & investing" or "money."
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