Is Contributing to a Nondeductible IRA Right for You?

If you’re considering making contributions to a nondeductible IRA, first learn about all of your options. This quick guide will explain the differences between deductible, nondeductible and Roth IRAs and how to choose the right one for you.

Comparing IRA Types

Nondeductible IRA

A nondeductible IRA is an IRA plan that allows you to make regular contributions as it grows your money. With a nondeductible IRA, your contributions must be after-tax dollars, meaning that you cannot deduct those contributions when you do your taxes.

A nondeductible plan may be beneficial to those who don’t have a retirement plan through their employer or who have already maxed out other retirement options.

Deductible IRA

A deductible IRA allows you to contribute pre-tax dollars. It also allows your employer to match your contribution up to a certain percentage. The money in your account grows tax-free, but you may have to pay a tax when you withdraw.

Roth IRA

Roth IRAs are similar to nondeductible IRAs in that you can only contribute after-tax money. However, the key difference is that with a Roth IRA, when you withdraw funds, the money is not necessarily taxed. There are several factors that determine if your Roth IRA withdrawals are taxed, including:

  • How long the money has been in the IRA
  • When you make the withdrawal
  • If the withdrawal included contributions only, or if it included your earnings
  • Why the withdrawal was made

Choose the Right IRA Plan for You

Most financial advisors would agree that, because of the tax implications, nondeductible IRA plans are the least beneficial. You gain more benefits contributing to a deductible or Roth IRA plan, which will ultimately help you save the most in your retirement fund.

However, speaking with a professional is the best way to determine which IRA is right for you. For guidance you can trust, visit your nearest First Bank* financial advisor today.


———-

Sources:

CNN Money: http://money.cnn.com/retirement/guide/IRA_traditional.moneymag/index2.htm

Roth IRA: http://www.rothira.com/roth-ira-taxes-and-tax-issues

The Motley Fool: http://www.fool.com/retirement/iras/2015/06/18/what-is-a-nondeductible-ira.asp