Final answer:
A non-deductible, traditional IRA works more like a non-qualified plan as the contributions are made on an after-tax basis and the earnings are subject to income tax upon withdrawal.
Step-by-step explanation:
A non-deductible, traditional IRA works more like a non-qualified plan.
Non-deductible, traditional IRAs allow individuals to contribute money on an after-tax basis, meaning they do not get a tax deduction for their contributions. The contributions grow tax-deferred, similar to a qualified plan, but when the funds are withdrawn, the earnings are subject to income tax. This is different from a qualified plan, such as a traditional deductible IRA or a 401(k), where contributions are made on a pre-tax basis and are tax-deferred, and the funds are taxed upon withdrawal.
For example, in a qualified plan like a traditional deductible IRA or 401(k), if an individual contributes $5,000 and is in a 20% tax bracket, they effectively save $1,000 in taxes. However, in a non-deductible, traditional IRA, the individual contributes the full $5,000 after taxes, so there is no immediate tax benefit.