Ask a Business Expert

A: You actually have three IRA choices:

• Deductible IRA
• Nondeductible IRA
• Roth IRA

Generally it's better to forego a current income tax deduction in favor of the potential tax benefit to be realized from a Roth IRA — tax–free treatment for withdrawals of income from the account after five years if certain other conditions are met. Before making a decision, check for eligibility for a deductible IRA and a Roth IRA — different rules apply. For example, if you are an active participant in a company retirement plan your income level may bar your from making deductible IRA contributions but you may still be eligible to make Roth IRA contributions.

There are no income limitations on making nondeductible IRAs. As the name implies there is no deduction for contributions, although income builds up on a tax–deferred basis — the earnings on contributions are taxable income when withdrawn. But withdrawals cannot be treated as first coming out of after–tax contributions in order to avoid income recognition — withdrawals are apportioned between contributions and earnings so that there is immediate taxation. In view of this rule and the record keeping burden it entails, it may be better to put savings in another type of vehicle — for example, making maximum contributions to a 401(k) plan you participate in.

For more details about IRAs, see IRS Publication 590, Individual Retirement Arrangements, at www.irs.gov.