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The typical comparison between Traditional and Roth IRAs goes roughly as follows:

A traditional IRA allows you to invest pre-tax money into the account and it grows tax free. Once you withdraw the money it then gets taxed as though it were income based on the amount you withdraw for that calendar year. A Roth IRA has you invest post-tax money and also grows tax free. However, when you make withdraws in retirement that money is then tax free.

(comparison borrowed from here)

However, there are income limits concerning the eligibility of taking the deduction if the taxpayer has retirement plans offered by their employer. This brings up 2 questions:

  • If I'm above the deduction cap for a Traditional IRA (currently $66k/yr single and $110k/yr MFJ), can it still be considered "pre-tax"? (I'm assuming not, since it can no longer be claimed for any deduction)
  • If I'm between the upper deduction limit for a Traditional IRA and the income cap for a Roth IRA (currently $105k/yr Single and $168k/yr MFJ), is there any benefit to a Tradional IRA at all?
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thank-you, and welcome to the Money board at SE. Don't be shy. There's an MBA's worth of education to be had for the asking here. –  JoeTaxpayer Sep 21 '11 at 15:25

1 Answer 1

up vote 2 down vote accepted

You have two questions - first - no, if you are above the deduction limit, then you still have a traditional IRA deposit but with post tax money, tracked via form 8606.

Second - If I read this right, if you cannot take the deduction, but can do the Roth, by all means, this is the 'no-brainer' decision. Makes no sense to deposit non-deducted to a traditional IRA if you can do Roth.

But - for sake of the full picture - if above the Roth limit, you still should make the post tax deposit (to the traditional.) If you have no pretax IRA at all, you can convert immediately. If you have a mix, you have the option to convert piecemeal paying the tax on the pro-rated amount the pretax represents.

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