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Roth or nondeductible IRA? No-brainer

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in Small Business Tax,Small Business Tax Deduction Strategies

Although you don’t qualify for tax deductions, you may still stuff money into your traditional IRA each year. After all, the IRA still provides tax-deferred earnings, while the part of any distribution representing nondeductible contributions is tax-free.

Strategy: Stop it and switch to a Roth. Roth IRAs provide a clear-cut edge over nondeductible traditional IRAs. The only reason to keep contributing to the nondeductible IRA is if you don’t qualify for a Roth.

Know that the tax law phases out the deduction for IRA contributions if you’re an active participant in an employer plan and your modified adjusted gross income (MAGI) is between $60,000 and $70,000 in 2014. The phaseout range is between $96,000 and $116,000 of MAGI for married joint-filing couples. If you’re not an active participant, but your spouse is, it’s between $181,000 and $191,000.

If you’re getting little or no tax benefit from traditional IRA contributions, you might as well contribute to a Roth instead. With a Roth, qualified distributions after five years are 100% tax-free as long as you are age 59½ or older. Plus, you’re not subject to the rules for lifetime mandatory distributions, like you are with a traditional IRA. Thus, the choice of the Roth is often a no-brainer.

Tip: For 2014, the ability to contribute to a Roth IRA phases out between $114,000 and $129,000 of MAGI for single filers; $181,000 and $191,000 for married joint-filing couples.

{ 1 comment… read it below or add one }

Sean Tankarian May 15, 2014 at 7:13 am

The Roth 401k will likely gain in popularity, but plan sponsors should be careful to educate savers. A lot of contributors believe the Roth 401(k) has exactly the same rules as a Roth IRA, and they do not. Savers could be in for some surprises if they are not properly educated.


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