Deductible vs Non-Deductable IRAs

by Jane Meggitt

Choosing between investing in deductible or non-deductible Individual Retirement Accounts, better known as traditional or Roth IRAs, depends on both short and long-term financial goals and the individual's particular situation. While contributions to traditional IRAs may be deductible, they are only tax-deferred as they are taxed as ordinary income upon withdrawal. Contributions to Roth IRAs, made with after-tax monies, are tax free upon withdrawal.

Traditional IRAs

Anyone earning compensation who does not have an employer-sponsored retirement plan, such as a 401k, may deduct contributions to a traditional IRA on his federal income tax return. Even those covered by a retirement plan at work may deduct all or part of the contribution if meeting income limits. Traditional IRA owners cannot commence withdrawals without penalties until reaching the age of 59 1/2, and mandatory withdrawals must begin at age 70 1/2. Although withdrawals are taxed, most retired taxpayers will be in a lower tax bracket than during the working years.

Roth IRAs

Withdrawals from Roth IRAs are tax free if the owner begins making withdrawals after the age of 59 1/2, as long as the account has been open for a minimum of five years. Unlike the traditional IRA, there is no mandatory withdrawal age, so the Roth IRA may be used for estate-planning purposes to leave a tax-free inheritance to your heirs. However, not everyone qualifies to contribute to a Roth IRA. Contributions are based on the taxpayer's adjusted gross income. Roth IRA accounts must be designated as such when opened.


At the time of publication, the annual contribution limits for both traditional and Roth IRAs are the same. Those under age 50 may contribute up to $5,000, and individuals over the age of 50 may contribute $6,000, assuming there is at least that amount of earned income. While traditional IRA contributions cannot be made after the age of 70 1/2, those still earning income after reaching that age may continue contributing to Roth IRAs.

Traditional IRA Income Limits for Deductibility

For 2011, those who are covered by a employer-sponsored plan and want to deduct traditional IRA contributions may do so if meeting the income limits. Taxpayers filing as single with an adjusted gross income of $56,000 or less may take the full deduction, and may take a partial deduction if the AGI is not over $66,000. Beyond that amount, no deduction is permitted. Married couples filing jointly, with both spouses enrolled in an employer retirement plan, may take the full deduction if their AGI is $90,000. With an AGI under $110,000, they may take a partial deduction, but above that amount no deduction is allowed. However, anyone may contribute to a traditional IRA even if it's not deductible.

Roth IRA Adjusted Gross Income Limits

Only taxpayers meeting certain AGIs may contribute to Roth IRAs. The income limits for single filers is an AGI of $107,000 or less in order to qualify for the full contribution. Single filers with an AGI between $107,000 and $122,000 may make partial contributions, and above that amount no contribution is permitted. Married couples filing jointly with an AGI under $169,000 may contribute the full amount, and with an AGI between $169,000 and under $179,000 may make a partial contribution. If their AGI is over $179,000, they cannot contribute to Roth IRAs.

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