Question

IRA Traditonal

Forum|Forum|5 years ago
July 10, 2020
1 reply
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Hello,

I setup a Traditional IRA and contributed for 2019, however when I filed it says I was not eligible to do any deductions/refunds for 2019. Since it's traditional will that mean I will be taxed again when I take the money out? Should I have done a Roth instead? What is the best plan of action from here?

IRA

A

AnnetteB6

No, you will not be taxed again when you take the money out of the Traditional IRA. As long as you do not take the deduction for the contribution, you will have a non-deductible contribution to your Traditional IRA. This is known as your basis. When you take a distribution from the Traditional IRA in the future, part of every distribution will include some of the basis and some of the deductible contributions you have made. So, technically, you will not pay tax on the part attributed to the non-deductible contribution. However, you will not be able to designate all of a withdrawal to be taken from the basis.

Roth IRA contributions may also be limited in such a way that you would not be allowed to make a Roth IRA based on your income, so it is difficult to say whether you should have contributed to a Roth IRA instead.

Without knowing your tax situation and goals it is not possible to tell you the best plan of action. One thing you can consider is to report the non-deductible contribution to the Traditional IRA on your return and then convert the contribution to a Roth IRA (which would be reported on your 2020 tax return). This is known as a back door Roth IRA contribution. Read more about it before deciding that is what you should do.

@linkkoh

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