Non-Deductible IRAs And Intermediate Holding Periods

Abstract

This note examines the feasibility of using the non-deductible IRA with 10 percent early withdrawal penalty tax as an intermediate-term investment vehicle. In todays market, individuals who do not expect o be in a lower tax bracket when they withdraw funds should consider this use of the non-deductible IRA only if they place common stock in their IRA. Individuals who expect to be in a lower tax bracket often can effectively use this strategy whether they invest in bonds or stock. The attractiveness of this strategy is greatly enhanced if we return to a higher inflationary (and returns) environment and/or if marginal tax rates are increased.