Pretax vs. Post-taxable IRA Contributions

Your IRA contribution choices affect your taxes both in the year of contribution and in retirement.

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Individual retirement arrangements offer several different options for how you want to save for retirement. Pretax contributions can only be made to a traditional IRA. After-tax contributions can be made to either a traditional IRA or Roth IRA. Knowing how these contributions affect your income taxes, both in the year that you make the contribution and when you later take distributions, helps you better plan for your retirement needs.


You must have earned income, such as wages or self-employment income, to contribute to any IRA. You can make pretax contributions to a traditional IRA if you are under 70 1/2 and either you or your spouse do not participate in an employer-sponsored retirement plan. If either of you do participate in an employer-sponsored plan, your income must fall below the annual limits. As long as you have earned income and meet the age requirement, you can make an after-tax contribution to a traditional IRA regardless of your income. To contribute to a Roth IRA, you can be of any age, but your income must fall below the annual limits.

Tax Treatment of Contributions

Making a pretax contribution to a traditional IRA allows you to claim an adjustment to income on your tax return. Adjustments can be claimed even if you don't itemize your deductions. Though you don't get a tax deduction for after-tax contributions to a traditional IRA, you must report them using Form 8606, so that the IRS can track your basis in the account. Roth IRA contributions receive no deduction, so you usually don't have any reason to report it on your income tax return. However, if your income is low enough, it might qualify you to claim the retirement savings credit.

Tax Treatment of Distributions

When you make pretax contributions to a traditional IRA, your distributions count as taxable income. If you make after-tax contributions to a traditional IRA, your distributions are prorated between after-tax contributions, which come out tax-free, and pretax contributions and earnings, which count as taxable income. With Roth IRAs, all qualified distributions are tax-free. However, if you have to tap your Roth IRA early, you can remove the contributions tax-free first. Only after exhausting your contributions are the earnings, which are taxed and subject to the 10 percent early withdrawal penalty, removed.

Planning Opportunities

The rule of thumb is that a tax-deductible traditional IRA contribution is best when you think your current tax rate is higher than what you will pay in retirement. Alternatively, if you think your retirement tax rate will be higher, a Roth IRA is often the better option; making Roth IRA contributions is superior to after-tax traditional IRA contributions. However, if you cannot contribute directly to a Roth IRA because of your income, consider making an after-tax traditional IRA contribution and then converting to a Roth IRA because the IRS does not restrict conversions based on income.

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About the Author

Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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