. Whereas most workers and their spouses can contribute to regular (traditional) IRAs, only some people can deduct their contributions.
There is general agreement that, for those individuals who can choose between Roth and deductible IRAs
, the major factor is the individual's income tax rate before and after retirement.
Tax-deferred accounts include deductible IRAs
and 401(k) type accounts.
Federal deficits, public policy on Social Security, allowing deductible IRAs
or closing those "loopholes" all have an effect.
However, we can divide these into two main categories, deductible IRAs
and nondeductible IRAs.
* Includes defined-contribution plans, profit-sharing plans, 401(k) plans, 403(b) plans, 457 plans, Keogh plans, Simplified Employee Plans (SEPs), SIMPLE plans and deductible IRAs
. Exhibit 2: Aftertax Balance in 20 Years Assumptions: An individual invests $6,000 of aftertax funds each year for 9 years at 7% before taxes and then withdraws funds after 11 more years; in a deductible pension, he invests $9,231 of before-tax funds, which is $6,000 of aftertax funds.
Gone are the days of deductions for interest on consumer debt, fully deductible IRAs
-- and whatever else the Tax Reform Act of 1986 did away with.
The accounting analysis can be found in Auster and Chang, "Roth IRAs or Deductible IRAs
: The Contribution and Conversion Decision," Journal of Pension Planning and Compliance, Vol.
The plan is less complicated than a money purchase or profit-sharing plan and allows greater contributions than those for deductible IRAs
Perhaps these excess funds can be used for deductible IRAs
, stock options, Sec.
As deductible IRAs
, the tax basis is zero since contributions were deducted in arriving at AGI.
With these accounts (which should be kept separate from any deductible IRAs
you may have), you can't deduct the contribution, but the growth continues to be deferred from taxes until you withdraw the money.