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Dr. Don Taylor, CFA, advice columnistSaving when you expect to be rich

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

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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:

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."'s corrections policy -- Posted: March 2, 2006
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