Should I Make Non-Deductible Contributions to an IRA or Roth IRA?
By Beverly DeVeny and Jeffrey Levine
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This week's Slott Report Mailbag looks at how the qualified reservist distribution works and answers a question on whether to make non-deductible contributions to a Traditional IRA or Roth IRA. As always, we recommend that you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
I have a question about the Roth IRA, and how the qualified reservist distribution works. Is it the same as the traditional IRA? Also, I plan on using these funds for a down payment on an SBA loan to buy a business. Avoiding the 10% penalty because I’m currently a deployed reservist is huge. But if I can avoid the tax as earnings, that would be even better. Comments? Suggestions? Your website and IRS Publication 590 are the only places I have seen the QRD, so any additional help would be greatly appreciated.
There is no such thing as an exception to income tax. You’ve already paid the income tax on your Roth IRA contributions and/or conversions, so they can be distributed income tax-free. If, however, you distribute earnings from your Roth IRA and the distribution is not a qualified distribution, those earnings will be taxable.
If your distribution is a qualified reservist distribution, then there will be no 10% penalty.
My wife and I live in a community property state. The majority of our assets are in my IRA. I understand that I can setup stretch IRAs for our children. My concern is that Congress is discussing modifying the stretch IRA program. My question is: if the Mrs. should pass away before I do, can she somehow use my IRA funds to get stretch plans started?
Even though you live in a community property state, federal rules apply to retirement plan assets. Your IRA cannot be transferred or assigned during your life, unless it is through a divorce. Your spouse cannot direct where any part of your IRA goes if she dies before you.
For the last two years, I have made non-deductible contributions to a traditional IRA. Should I be making the same instead to a Roth IRA?
As long as you meet the income guidelines for making a Roth IRA contribution, it’s generally better to put your after-tax IRA contributions into a Roth IRA. The income limits are indexed for inflation each year. You can find the current limits in IRS Publication 590 or on our website.
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