Q. I’m confused about the different tax treatments given the non-deductible traditional IRA versus the Roth IRA. Why isn’t a non-deductible traditional IRA treated the same way as a Roth IRA when withdrawals are made? With both IRAs there is no deduction, the earnings grow tax-free and no tax benefit when the contribution is made. Why are they different?
A. You’re right. It can be confusing.
But you’re mixing up one important feature of these accounts.
First, you’re correct in saying that non-deductible IRAs and Roth IRA contributions do not allow a tax deduction for the year of contribution, said Nicholas Scheibner, a certified financial planner with Baron Financial Group in Fair Lawn.
But you are not entirely correct to say the “earnings grow tax-free” for both accounts, he said.
“In the non-deductible IRA, the earnings are tax-deferred,” he said. “In the Roth IRA, the earnings are tax-free.”
There are other differences between the two accounts: income contribution limits.
A non-deductible traditional IRA contribution can be done at any income level, he said, but a Roth IRA contribution has income limitations.
But there is no income limitation on a Roth conversion, Scheibner said.
“This allows for the potential for a Roth conversion to be done after a non-deductible IRA contribution has been funded,” he said.
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Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.