Roth vs Non deductible traditional Ira


K

KWAnne

What, if anything, is the difference between contributing to
a Roth IRA or making a non-deductible contribution to a
traditional IRA?
 
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I

Ira Smilovitz

KWAnne said:
What, if anything, is the difference between contributing to
a Roth IRA or making a non-deductible contribution to a
traditional IRA?
There's no difference in the CONTRIBUTION. There's a big
difference when you take a DISTRIBUTION. Qualified
distributions from a traditional IRA are subject to income
tax; qualified distributions from Roth IRAs are tax-free.
Non-qualified distributions from each may be subject to
additional penalties.

Ira Smilovitz
 
H

HW \Skip\ Weldon

KWAnne said:
What, if anything, is the difference between contributing to
a Roth IRA or making a non-deductible contribution to a
traditional IRA?
Assuming you are eligible for both, there is no tax
difference between contributing to the two mentioned
arrangements. There may be a tax difference between
withdrawing from the two, but alas, we don't know what the
rules will be in the future.

-HW "Skip" Weldon
Columbia, SC
 
D

David Woods, EA, ChFC, CLU

KWAnne said:
What, if anything, is the difference between contributing to
a Roth IRA or making a non-deductible contribution to a
traditional IRA?
Besides the ability or not to take qualified distributions
tax free?
 
D

Don Priebe

What, if anything, is the difference between contributing to
a Roth IRA or making a non-deductible contribution to a
traditional IRA?
With a traditional IRA, you must start taking distributions
when you reach 70-1/2. The portion of the distribution that
represents earnings is taxed at ordinary rates.

With a Roth, there is no requirement to take distributions
at any age. Any distributions that you do take are tax free.

(Usual assumptions)
 
B

Barry Margolin

KWAnne said:
What, if anything, is the difference between contributing to
a Roth IRA or making a non-deductible contribution to a
traditional IRA?
Roth withdrawals are tax-free, withdrawals from traditional
IRAs are taxed based on the proportion of deductible to
non-deductible contributions that were made to it (so if all
the contributions to the regular IRA were non-deductible,
then the withdrawals are also tax-free).

If your MAGI is above a certain limit (I think it's $110K
for individual filers) you are not eligible to make Roth
contributions at all.
 
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P

Phil Marti

KWAnne said:
What, if anything, is the difference between contributing to
a Roth IRA or making a non-deductible contribution to a
traditional IRA?
This is one of the few "no-brainers" in tax law. If you're
eligible for a Roth, it is ALWAYS better than a
nondeductible traditional. The difference is that you don't
pay tax on qualified distriubtions of earnings from the
former, but earnings on the latter are taxed as ordinary
income.
 
C

Catherine White

KWAnne said:
What, if anything, is the difference between contributing to
a Roth IRA or making a non-deductible contribution to a
traditional IRA?
There is a very big difference once you retire. A
nondeductible traditional IRA will have everything you
withdraw subject to tax, and you will be required to take at
least minimum distributions annually. A Roth IRA will have
future withdrawals available tax-free, and there is no
requirement to take a minimum annual distribution. So if
you want to save that money for even later years, you may.
Contributions to a Roth IRA are subject to income
restrictions (don't have the numbers off the top of my
head), so if you're above that income, you must do the
traditional nondeductible.

Catherine
 
D

D. Stussy

KWAnne said:
What, if anything, is the difference between contributing to
a Roth IRA or making a non-deductible contribution to a
traditional IRA?
The earnings on the traditional IRA are taxable - but a
non-deducted contribution is not AGI limited.

The earnings on the Roth IRA are excludible (generally), but
the ability to contribute is limited by AGI.
 
M

Mike Lewis

KWAnne said:
What, if anything, is the difference between contributing to
a Roth IRA or making a non-deductible contribution to a
traditional IRA?
You pay tax on the investment income on a regular IRA...not
on a Roth.'

Mike Lewis, CPA
 
H

Herb Smith

KWAnne said:
What, if anything, is the difference between contributing to
a Roth IRA or making a non-deductible contribution to a
traditional IRA?
Withdrawals from a Roth IRA are completely tax and penalty
free, once you meet the "qualified distribution" criteria
(age 59-1/2 and account open for 5+ years). No distributions
are required, ever.

A nondeductible IRA must begin distributions at age 70-1/2
(RMDs). Distributions from an IRA are almost composed of a
prorata amount of contributions and earnings. The earnings
are always subject to ordinary income tax, even if you are
over age 59-1/2.

See Pub 590 for other differences.
 
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D

D. Stussy

Roth withdrawals are tax-free, withdrawals from traditional
IRAs are taxed based on the proportion of deductible to
non-deductible contributions that were made to it (so if all
the contributions to the regular IRA were non-deductible,
then the withdrawals are also tax-free).
Incomplete. Earnings on a traditional IRA are taxable. The
exclusion from income stops when the non-deducted (or
post-tax) basis is depleted.
 
T

Thomas Healy

What, if anything, is the difference between contributing to
Roth withdrawals are tax-free, withdrawals from traditional
IRAs are taxed based on the proportion of deductible to
non-deductible contributions that were made to it (so if all
the contributions to the regular IRA were non-deductible,
then the withdrawals are also tax-free).
Actually even if all contributions are non-deductible, there
will still be taxable income in the distribution, because
the earnings in a regular IRA will be taxed. The excluded
income will be the proportion, non-deductible contributions
divided by total value.
 
E

effi

There is a very big difference once you retire. A
nondeductible traditional IRA will have everything you
withdraw subject to tax, and you will be required to take at
least minimum distributions annually. A Roth IRA will have
future withdrawals available tax-free, and there is no
requirement to take a minimum annual distribution. So if
you want to save that money for even later years, you may.
Contributions to a Roth IRA are subject to income
restrictions (don't have the numbers off the top of my
head), so if you're above that income, you must do the
traditional nondeductible.
you mention:
"A nondeductible traditional IRA will have everything you
withdraw subject to tax, and you will be required to take at
least minimum distributions annually. "
nondeductible contributions to a traditional ira are made
with after tax dollars so they are the cost basis of the ira

everything taken out of the ira (deductible contribtuions,
earnings on deductible contirbutions, and earnings on
nondeductible contirbutions) is subject to tax except the
cost basis
 
E

effi

Roth withdrawals are tax-free, withdrawals from traditional
IRAs are taxed based on the proportion of deductible to
non-deductible contributions that were made to it (so if all
the contributions to the regular IRA were non-deductible,
then the withdrawals are also tax-free).

If your MAGI is above a certain limit (I think it's $110K
for individual filers) you are not eligible to make Roth
contributions at all.
you mention:
"Roth withdrawals are tax-free, withdrawals from traditional
IRAs are taxed based on the proportion of deductible to
non-deductible contributions that were made to it (so if all
the contributions to the regular IRA were non-deductible,
then the withdrawals are also tax-free)."
not all withdrawals from the ira would be tax-free

nondeductible contributions would be tax free when withdrawn
from the traditional ira

earnings on the nondeductible contributions would be taxed
when withdrawn from the ira (deductible contributions would
also be taxed when withdrawn from the ira; the earnings on
them would also be taxed when withdrawn)

per 2005 U.S. Master Tax Guide, Paragraph 2178:
"Cost Basis: An individual's cost basis in distributions
made from a traditional IRA is the sum of the nondeductible
contributions made to the IRA minus any prior withdrawals or
distributions of nondeductible contributions (Notice
87-16)."
 
D

David Woods, EA, ChFC, CLU

Incomplete. Earnings on a traditional IRA are taxable. The
exclusion from income stops when the non-deducted (or
post-tax) basis is depleted.
Well as a practical matter, it never is depleted unless you
liquidate all IRA's. Otherwise, you only use a fraction of
the remaining basis on any distribution.
 
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D

D. Stussy

Well as a practical matter, it never is depleted unless you
liquidate all IRA's. Otherwise, you only use a fraction of
the remaining basis on any distribution.
As the basis is prorated across the life of the expected
return, true. However, remember that one can live longer
than one's expectancy, so it is possible to deplete the
basis before depleting the IRA in full. Remember Revenue
Notice 88-118, which in a modified form, became the "general
rule" used in the 1990's to amortize annunity payments?
It's quite possible to live longer than the notice's
periods.
 

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