Difference Between Traditional Deductible & Nondeductible IRAs

Tax breaks are the main difference between two IRA types.

While there are many types of Individual Retirement Accounts, there are two main types--the traditional deductible IRA and the non-deductible IRA. The most notable difference between the two, as the name indicates, is that contributions to one type are tax-deductible, while contributions to the other are not.

Features

You do not pay income tax on the income that's contributed to a traditional deductible. The interest that's earned on IRA contributions also won't be taxed until the money is withdrawn. However, you must pay income taxes on income that's contributed to a non-deductible IRA. You can take an above-the-line tax deduction for contributions to a traditional deductible IRA. Unfortunately, there is not a tax deduction for contributions you make to a non-deductible IRA.

Effects

When you withdraw money from a traditional deductible IRA, you will pay taxes on the money no matter when the withdrawal is made. Withdrawals from a traditional deductible IRA are taxed at the income tax rate you fall into the year you make the withdrawal. On the other hand, certain withdrawals from a non-deductible IRA are not taxed at all. Contributions to a non-deductible IRA are not taxed at withdrawal and earnings are only penalized when they are withdrawn prematurely.

Considerations

Your income might affect your ability to contribute to a non-deductible IRA. If your income is above a certain amount you may not be able to make the maximum $5,000 annual contribution. Or, you may not be able to contribute at all.

The traditional deductible IRA does not have income limits that restrict your ability to contribute. However, there are income limits that keep you from receiving the tax break on your annual contribution.

Time Frame

There is an age limit for contributions on the traditional deductible IRA. You can only make contributions to a traditional deductible IRA until you reach age 70½. After that, you're no longer able to contribute money to the IRA.

There is no age limit for contributions to a non-deductible IRA. You can continue making contributions as long as you'd like.

Warning

You must take required minimum distributions from a traditional deductible IRA starting at age 70½. The minimum withdrawal that's required each year is based on your IRA balance and your life expectancy. If you don't make the required distribution you'll have to pay taxes on the amount you should have withdrawn. The non-deductible IRA does not have a required minimum distribution at any age.

References

• Internal Revenue Service
• Investopedia
• Fool.com