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.

1.

Hello,  

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.

Answer:
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.

2.

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?

Answer:
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.

3.

Hi,

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?

Al Haavisto

Answer:
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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