Should I Make Non-Deductible Contributions to an IRA or Roth IRA? | Ed Slott and Company, LLC

Should I Make Non-Deductible Contributions to an IRA or Roth IRA?

By Beverly DeVeny and Jeffrey Levine
Follow Us on Twitter:
@theslottreport

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.


Receive expert IRA and tax planning articles straight to your email. Subscribe here.


Content Citation Guidelines

Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.

Please be advised that prior to distributing re-branded content, you must send a proof to matt@irahelp.com for approval.

For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.

For charts:
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.

For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Please contact Matt Smith at matt@irahelp.com or (516) 536-8282 with any questions.

 

Find members of Ed Slott's Elite IRA Advisor GroupSM in your area.
We neither keep nor share your information entered on this form.
 

I agree to the terms and services:

You may review the terms and conditions here.