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I have been getting a bit confused by the variety of IRA accounts available to me and want to check that my understanding of each is correct, in a general sense (ignore complexities like 5 year rules, etc... and assume I am withdrawing at an age that does not incur penalty):

  • Roth IRA: Contributions are with post-tax dollars. Any money I withdraw after an appropriate time is completely tax free. Contributions + interest/gains... the whole thing is tax free at withdrawal
  • Traditional IRA: Contributions are with pre-tax dollars. Any money I withdraw at the appropriate time will be subject to income tax. Contributions + interest/gains... the whole thing is taxed as income
  • Nondeductible IRA: Contributions are post-tax dollars. At withdrawal I am only taxed on the interest/gains, and not on the contributions. This makes it essentially a similar but worse version of the Roth.

Is this all right?

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    That looks good to me. Keeping meticulous record of non-deductible IRA is key.
    – Pete B.
    Feb 4, 2021 at 17:52
  • @PeteB. can you elaborate on what you mean by keeping a record of it? And why it is key?
    – Runeaway3
    Feb 4, 2021 at 17:53
  • You need to keep a record of your contributions, so those are not taxed.
    – Pete B.
    Feb 4, 2021 at 19:46
  • Note that when you say "after an appropriate time", that includes the condition that you must be over age 59.5.
    – user102008
    Feb 4, 2021 at 20:04
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    Note that there is no separate "nondeductible IRA". Rather, your last two points are both Traditional IRA. You can have pre-tax contributions and after-tax (non-deductible) contributions to a Traditional IRA, and any earnings are always pre-tax. However, when you distribute or convert from Traditional IRA, you must always distribute/convert both pre-tax and after-tax amounts in the same proportion as in your Traditional IRAs overall (this is the pro-rata rule).
    – user102008
    Feb 4, 2021 at 20:07

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You are correct. At face value a non-deductible IRA may seem like it's the same as a normal brokerage account, but the difference is that gains and dividends within a non-deductible IRA are not taxed until they are withdrawn (just like a deductible IRA), so when you buy and sell securities, there is no immediate tax consequence (meaning you don't have capital gains taxes), and the taxable portion of withdrawals is treated as ordinary (unearned) income.

However, since long-term capital gains tax rates are typically lower than income tax rates, the benefit of deferral may be outweighed by a higher tax rate in the end.

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    That down-side at the end is true for any pretax account - converting long term gains to ordinary income. But, with planning, and Roth conversions, the post tax IRA has its use.
    – JTP - Apologise to Monica ♦
    Feb 4, 2021 at 18:54
  • It's useful to note that a nondeductible IRA can be converted to a Roth IRA. There is no reason to accept the features of a nondeductible IRA as-is. Its value is as an alternative "backdoor" route to a Roth.
    – nanoman
    Feb 4, 2021 at 19:21
  • @nanoman: That's unless there is also pre-tax money in Traditional IRAs, in which case any conversion would have to have both pre-tax and after-tax parts, and that may be problematic depending on how much pre-tax money there is.
    – user102008
    Feb 4, 2021 at 20:08

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