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Ask the Expert: There's more than one kind of IRA

What’s the difference between the deductible IRA and the nondeductible IRA? Are these other names for a traditional IRA and Roth IRA?

No. You've named three types of IRA — the deductible (aka traditional) IRA, the nondeductible IRA and the Roth IRA — each subject to different rules.

Here’s the rundown:

Contributions to a deductible IRA reduce your current taxable income. IRA earnings are untaxed until they’re withdrawn. But after you turn 72, you’re required to take minimum annual withdrawals. All withdrawals are taxed as ordinary income. Withdrawals taken before age 59½ are also subject to a 10% early withdrawal penalty.

You qualify for a deductible IRA if you and your spouse didn't participate in a workplace retirement plan during the year. Otherwise, eligibility depends on your income and tax filing status and on whether either of you has a workplace retirement plan.

Contributions to a Roth IRA don't reduce your current taxable income. But you can withdraw them at any time, regardless of your age, without incurring a tax or a penalty. Roth IRA earnings grow untaxed. You’re never required to take Roth withdrawals. And withdrawals you do take are tax-free after you're 59½ and have owned the account for five years.

If you’re single, in 2021 your can’t contribute to a Roth unless your income is less than $140,000. If you’re married filing jointly, it must be under $208,000.

Contributions to a nondeductible IRA don't reduce your current taxable income. Earnings are untaxed until withdrawn and subject to the early withdrawal penalty if withdrawn before age 59½. After age 72, you must take annual minimum withdrawals. Each withdrawal includes some taxable earnings and some tax-free return of contributions.

The bottom line

A nondeductible IRA usually makes sense only if you’re ineligible for a deductible IRA or a Roth IRA.

More information

bit.ly/BogleheadsnondeductibletradIRA

bit.ly/InvestopediaIRA

TO ASK THE EXPERT Send questions to act2@newsday.com. Include your name, address and phone numbers. Questions can be answered only in this column. Advice is offered as general guidance. Check with your own consultants for your specific needs.

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