John M. Hoffman & Associates CPAs
Frequently Asked Tax Questions
Individual Retirement Accounts – IRAs
“So why would I want to do a non-deductible IRA – does it make any sense?”
Non-Deductible IRAs are probably the last resort of tax favored retirement savings. What we mean is that after participating in your employer sponsored plan (401(k) for most), and if your income is too high for ROTH type IRAs and deductible IRAs you still might want to contribute to your traditional IRA even if the contribution is not tax deductible.
The reason is that the growth of the IRA is still tax deferred. Let’s say that you put $4,000 into a non-deductible IRA today and it grows to $10,000 over the years to retirement. That $6,000 is not taxed along the way, it grows tax deferred. And while tax deferred is not as good as tax free, for most people it is still better than currently taxable.
Assuming this is the only IRA you have, and you withdraw the entire balance when you are 60 years old (over 59 and ½ is key), you get to recoup your $4,000 contribution as a tax free return of contribution and only the remaining $6,000 is taxable.
If instead you withdrew $1,000 per year for ten years (in a very simplistic world), 40% of each withdrawal would represent a return of your contribution and the other 60% would be taxable.
Not too exciting but something to consider. What is exciting you may ask – we think that ROTH tax free income is exciting.
