Advice needed: Non-deductible IRA vs taxable brokerage account?

[Scott R]

Hello all, I'm brand new here, and new to investing.  Well, I've invested in company-sponsored 401k's for a long time, but I'm just now trying to figure out investing outside of that.  Currently, I'm investing up to my company match in my 401k.  I was disappointed to discover that I'm not eligible to open a Roth IRA because my household AGI is a bit above the phase-out point.  So, some questions:

1) If I wanted to invest in PRPFX, would it make more sense to do this via a non-deductible Traditional IRA first (and then if I have extra via a taxable brokerage account), or to just skip the non-deductible IRA altogether, and just use a taxable brokerage account?  The limitations/negatives that I'm aware of with a non-deductible IRA seem like enough of a bummer that I'm wondering why bother messing with it at all, but since I'm a newbie, I'm sure I'm overlooking some positives.

2) If I buy some PPRFX every year with a taxable brokerage account, and don't plan to sell it (until I retire), am I on the hook to pay taxes on anything till then?  Based on my reading of things, it sounds like taxes only come into play when I actually sell stock/funds, and that I wouldn't be taxed on the earnings each year if I'm just letting it sit there (growing) and not actually cashing any of it out (selling it).  Is that right?

3) I'd love some recommendations on my 401k.  My fund choices are limited, but I'm still tempted to max out my 401k contributions so as to reduce my taxable income.  To answer this question, you may want details as to what my fund choices are and, if so, I'll be happy to report back with that info.

[AdamA]

2) If I buy some PPRFX every year with a taxable brokerage account, and don't plan to sell it (until I retire), am I on the hook to pay taxes on anything till then?  Based on my reading of things, it sounds like taxes only come into play when I actually sell stock/funds, and that I wouldn't be taxed on the earnings each year if I'm just letting it sit there (growing) and not actually cashing any of it out (selling it).  Is that right?

You'll pay taxes on PRPFX every year.  Some of the stocks the fund owns pay dividends and the bonds pay interest.  You'll also pay capital gains taxes whenever the fund sells assets at a gain. 

My understanding is that it's pretty tax efficient, although it's grown to something like a 10 billion dollar fund over the past decade.  If people suddenly want to get out of the fund, you may have a bad year as far as taxes go, but I'm not sure.  I own the fund, and I like it enough that I would not be too concerned about a year or two of above average taxes.

3) I'd love some recommendations on my 401k.  My fund choices are limited, but I'm still tempted to max out my 401k contributions so as to reduce my taxable income.  To answer this question, you may want details as to what my fund choices are and, if so, I'll be happy to report back with that info.

Your 401k probably has a decent S&P index fund (or something close enough) and also a decent cash or short term bond fund. 

You could use your 401K for the stock and cash positions of a 25% x 4 do-it-yourself Permanent Portfolio (as described in Fail Safe Investing), and then use a regular brokerage account for the gold and bond portion. 

[Scott R]

Thanks much for the reply!  I'm sure I'll have some follow-up questions (e.g., specifics regarding my 401k fund choices).  What's your opinion on opening up a traditional non-deductible IRA?  Do you think it would it be worth it to put money into that ($5000/year) and then put any extra I can muster into the taxable account, or should I not even bother with the non-deductible IRA and just use the taxable account for everything (beyond my 401k)?

[smurff]

Scott, can you open a Roth IRA?  (There are income limits.)  If so, that might be better than a nondeductible IRA. 

I have heard that there are some provisions about the nondeductible IRA that make it better than a Roth IRA for a handful of people, but someone more experienced in retirement/qualified accounts can comment better about this.

[Pkg Man]

If you can't use your 401K for the treasury bonds, then a non-deductible IRA would be a better place to house them than a traditional since the interest wouldn't be taxed each year. 

[Scott R]

smurff, I mentioned it in my first post, but no, unfortunately I can't make use of a Roth IRA (our household AGI is above the phase-out limit).

Thanks for everyone's replies so far!  Assuming the advice I've been given thus far is correct, then I think I'm understanding things as follows:

1) Per Adam, I should split my 401k allocations so that 50% go to stocks (e.g., an S&P 500 fund), and 50% to cash (what sort of fund is that?).

2) If my 401k was $50,000, I should ideally put another $50,000 into a non-deductible IRA and/or taxable brokerage account, evenly split among Gold and Bonds, and, per Pkg Man, Bonds would be better in a non-deductible IRA.  What about Gold?  Should that go into the IRA or the taxable brokerage account?  Or, I'm thinking, that should maybe be invested in physical gold coins that I have easy access to?

Now, what about PRPFX?  If I did have access to that and wanted to invest in that, would it be better to have that in the non-deductible IRA or the taxable brokerage account?

Also, in regards to #2 above, if I had $50k in my 401k accounts (and am continuing to contribute each year, so that amount would hopefully be growing), then I can tell you that I'm not going to be able to come up with another $50k now to invest in Gold and Bonds.  So that would leave me heavily invested in Stocks/Cash.  That gets me to wondering if there's some other fund choices available to me in my 401k which would behave more like Gold or Bonds, so that I should allocate some of my funds in my 401k to that?  For example, might there be a fund which invests in commodities, which might behave similarly to Gold?  And I see that there's a PIMCO Global Bond fund...would that be suitable for the Bond portion of the HB PP or is that something entirely different?

[AdamA]

1) Per Adam, I should split my 401k allocations so that 50% go to stocks (e.g., an S&P 500 fund), and 50% to cash (what sort of fund is that?).

Check to see what kind of money market and short term bond funds are available for your 401k.

Ideally, you want a treasury only money market fund.  If you can't do this, a short term US Treasury bond fund will do fine.
The fund needs to hold T-bills or short term US bonds.  You really don't want anything else.  It's possible that you might find that there's a fund that holds mostly short terms treasury bonds, and then some other investment grade bonds.  These are not as good, but will work if you're in a pinch (just realize that there's a little bit more risk with these). 

You don't want municipal bonds or corporate bonds, and be careful for short term federal and short term government bonds.  These are not the same as treasury bond funds.  They hold bonds from places like Fannie Mae and Freddie Mac.  Don't use them. 

If your 401k doesn't offer any of these, check to see if they offer a brokerage window.