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I am checking out a Traditional IRA calculator and it seems that if I check that I have an Employer Plan (I do have a 401k plan), my after Tax return is 272k. If I uncheck that box, the number goes down to 252k.

What relevance does having an employer plan have on my personal traditional IRA account?

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Summary: It's because you are effectively contributing more money in the second case, so you have more money at the end.

The effect of being covered by an employer retirement plan (in the case of a 401(k), that means either you or your employer contributed to it during the year) is that it prevents you from deducting Traditional IRA contributions unless your income is below a very low level (for Single filing status, it phases out at an MAGI of between $62k and $72k).

Since you are unable to deduct the Traditional IRA contribution, but you entered that you are still making the full $5500 contribution every year, that means you are making a non-deductible contribution of $5500 every year instead of a deductible contribution. Nondeductible contributions are "after-tax", whereas deductible contributions are "pre-tax" (because your taxable income is reduced by the amount of the contribution, so you effectively don't pay income tax on the income you used to contribute).

$1 of pre-tax money is not the same as $1 of after-tax money. If your marginal tax rate is 25%, then $1 of pre-tax money is equivalent to $0.75 of after-tax money. However, since in both cases you are putting in the same nominal amount of contribution ($5500), but one is pre-tax and one is after-tax, in the after-tax case you are effectively contributing more money, i.e. more money is taken out from your bank account that year. The $5500 pre-tax contribution is equivalent to only $5500 * 0.75 = $4125 after-tax, i.e. you are only short $4125 from your bank account at the end of the year after making a $5500 deductible contribution, whereas you are short $5500 after making a $5500 non-deductible contribution, so it's not a fair comparison.

The non-deductible Traditional IRA contributions are not taxed when withdrawn (though the earnings earned from those contributions are still taxed), so that's why you are left with a greater amount.

This is a similar situation to what happens when you try to compare a $5500 deductible Traditional IRA contribution to a $5500 Roth IRA contribution -- it will look like the Roth IRA case leaves you with much more money, but that's again because you are effectively contributing more money, because the Roth IRA contribution is after-tax, so it's not a fair comparison. (The Roth IRA case will produce a much greater "advantage" than the non-deductible Traditional IRA contribution case, because for a Roth IRA, both the contributions and earnings will not be taxed at withdrawal.)

  • Wow, that was a lot to process. The bottom line is that because my contributions are after-tax, when I withdraw it, I won't be taxed on the contributions. If my contributions were pre-tax, they would be taxed upon withdrawal. Is this correct? And furthermore, the earnings are taxed regardless of whether my contributions were pre or after tax. Do I have this right? – NeedAdvice Oct 9 '17 at 0:25
  • @NeedAdvice: Yes, that's right. You generally wouldn't keep after-tax money in a Traditional IRA, because earnings earned from the after-tax contributions are taxed again. Either pre-tax money in Traditional IRA, or Roth IRA, are both preferable to after-tax money in Traditional IRA. – user102008 Oct 9 '17 at 4:21
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Click on the ? icon next to "Employer Plan".

This is used to determine if you can deduct your annual contributions from your taxes. For more information on how an employer plan can affect your IRA tax deduction, see the definition for non-deductible contributions.

So, we look there:

The total of your Traditional IRA contributions that were deposited without a tax deduction. Traditional IRA contributions are normally tax deductible. However, if you have an employer-sponsored retirement plan, such as a 401(k), your tax deduction may be limited.

The $20K difference between $272K and $252K just happens to be $15% of $132,500 which is the amount of your non-deductible contributions.

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