Once your 401(k) or similar tax-deferred account is fully funded, your next money should go into a nondeductible Roth IRA. This year you can contribute $3,000 ($3,500 if you’re 50 or older). After five years and after reaching 59-1/2, all withdrawals will be tax-free.
However, in order to make a full contribution to a Roth IRA, your adjusted gross income (AGI) must be under $95,000, or $150,000 on a joint return. (Partial contributions are permitted with AGI up to $110,000 or $160,000, respectively.)
If you are ineligible to fund a Roth IRA you still can contribute to a nondeductible traditional IRA. However, that will require a certain amount of paperwork. Eventually, any gains will be taxed at ordinary income rates. And you still face the $3,000 or $3,500 contribution limit.
Therefore, you may be better off investing in a mutual fund held in a taxable account, where you can invest as much as you wish. Many mutual funds are “tax-managed” these days, so they won’t generate much of an annual tax bill. Alternatively, other mutual funds are tax-efficient, even without “tax-managed” in their name.
If you have profits on your mutual funds, they may qualify for long-term capital gains rates, which are lower than those on ordinary income. Especially if you are nearing age 70-1/2, when minimum distributions from an IRA will be required, and you have a sizable taxable income, you will benefit from capital gains treatment on such funds.
