Difference Between a Nondeductible Tradtional IRA & Deductible Traditional IRA

One of the benefits of a traditional IRA is that you can write off your contribution--provided that you're not phased out by income limits. If you do not qualify for the deduction, you can still contribute to a nondeductible traditional IRA.

Function

IRS phase-out limits for traditional IRA deductions only apply to people who are covered by employer-backed retirement plans through work. If you do not participate in an employer plan, there are no income limits for taking a traditional IRA deduction.

Significance

All IRAs shelter your assets from taxes on investment earnings as long as those assets remain inside the account. Therefore, a nondeductible traditional IRA does provide a limited tax benefit if you do not qualify to take a traditional IRA deduction.

Considerations

A nondeductible traditional IRA is only slightly better than opening a normal account at bank or brokerage house. Before you consider a nondeductible IRA, make sure you do not qualify for a Roth IRA, which has higher income limits. Maxing out contributions to an employer retirement plan, particularly if your employer matches contributions, may also be more profitable.

References

• IRS Publication 590: Nondeductible Contributions
• IRS Publication 590: Limit if Covered by Employer Plan
• IRS Publication 590: General Limit