146k views
2 votes
Do non-deductible, traditional IRAs work more like qualified or non-qualified plans?

User JCurativo
by
8.2k points

1 Answer

2 votes

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 The contributions grow tax-deferred, similar to a qualified plan, but when the funds are withdrawn, the earnings are subject to income tax.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.

User Jonathan Kehayias
by
7.5k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

9.4m questions

12.2m answers

Categories