You Can, but Should You? - Part 2

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You can make your 2017 IRA contribution until 4/15/2018….but SHOULD you?

Last week's recap: 

  • Money you take out of your Traditional IRA will be taxed at your tax-bracket rates
  • Money you take out of your Roth IRA is not taxed at all
  • …So why would you ever contribute to a Traditional IRA?

You need a little more info to answer that question…

There are two types of contributions you can make to a Traditional IRA:

 

Before-Tax Contribution (aka deductible contribution)

If you make a deductible contribution then you can deduct the contribution from your income.   Which means you'll  get a bigger tax refund… YAY!   But then you'll pay income taxes on all of it when you take it out in retirement - NOT the lower capital gains tax rates…BOO! 

 

After-Tax Contribution (aka non-deductible contribution)

If you make a non-deductible contribution you can't deduct the contribution from your income.  Which means you won't get a bigger refund… BOO!   But you also won't pay income taxes on that money when you take it out.  You'll only pay taxes on the growth and interest….YAY!....but at the higher tax-bracket rates, not lower capital gains rates….BOO!

(Roth IRA contributions works this way too.  You put in after-tax money.  The difference is you won't pay taxes on the growth and interest….YAY!)

 

So before 4/15/2018, you have 3 different IRA contributions you can make for 2017:

  • Roth IRA contribution
  • Deductible Traditional IRA contribution
  • Non-deductible Traditional IRA contribution

But which one should you choose?  You don't.  Uncle Sam decides for you….next week.