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Individual Retirement Accounts

Updated: Apr 6, 2022

A lot of people have asked me about this topic over the years. The best answer: The most appropriate IRA option for your retirement savings plan will be based on your specific situation. Bulldog Financial Planning can help you determine which type of contribution is best for you and your family.

This article describes basic eligibility for Roth accounts vs Traditional IRA accounts in 2021 and some key differences in tax treatment for each one. At the end there are a few summary points and a list of other important topics.

1. General eligibility - Are you eligible?

Taxable compensation and the maximum eligible contribution:

You must have taxable compensation. This can include wages, commissions, bonuses, and salaries. Other sources of compensation are listed by the the Internal Revenue Service in IRS Publication 590a.

The amount of your maximum eligible contribution, whether Roth or Traditional, will be limited to the greater of 100% of your taxable compensation or the annual limit. (2021: $6,000 and if you are age 50 or over $7,000)

Phase Outs: The IRS sets a range based on Modified Adjusted Gross Income (MAGI). See the table below. BFP can help estimate your MAGI.

2021 Phase Out Tables for Single and Married Filing Jointly Tax Filers:

Filing Status

Roth IRA

Traditional IRA Eligibility for an Income Deduction (Covered by a Retirement Plan)

Traditional IRA Eligibility for an Income Deduction (Not covered by a Retirement Plan)




No phase out

Married (Filed Jointly)


Your Covered: $105,000-$125,000 Spouse Covered: $198,000-$208,000

If both spouses are not covered, then there is no phase out.

This table Illustrates Key points about how to apply the phase outs:

Where does your MAGI fall in the range?

Roth IRA

Traditional IRA


Eligible to contribute

Eligible for a full deduction


Eligible for a reduced contribution

Eligible for a reduced deduction

At or Above

Ineligible to contribute

Ineligible for a deduction

2. Tax Deductibility of the Contribution - Is there an immediate tax benefit?

• Roth IRA - The contributions are not tax deductible.

• Traditional IRA - The contributions can be tax deductible subject to the phase outs shown above. See the phase out ranges table above for the examples.

3. Tax Treatment of Earnings - Are there Annual Taxes on capital gains, interest, or dividends?

An important disclosure: Investing presents the risk of loss and any investment in a retirement account could lose money.

When it comes to annual taxes, unlike the usual brokerage account, a retirement account will not incur taxation costs on earnings, dividends, or interest. Although recent tax changes have introduced UBTI taxes in retirement accounts the rules for capital gains, earnings, and interest did not change. (This is referring to an investment in a Partnership security which incurs an ‘Unrelated Business Taxable Income’ tax in an IRA as reported on tax form 990-T.) Biden’s unpopular Tax plans may change this in the future, but for the moment the points bulleted below are still true.

• Roth IRAs grow tax free

• Traditional IRAs grow tax deferred

4. Tax Treatment of Withdrawals

See this table for some basics: (this table does not address roth conversion amounts)

IRA Type

Qualified Distribution

Early Distribution without an exception

Early Distribution with an exception

Roth IRA

Tax Free

a) Contributions are not taxable or penalized

b) Earnings are taxable and penalized

a) Contributions are not taxable or penalized

b) Earnings are taxable but not penalized to the extent of the exception

Deductible Traditional IRA

Fully taxable

Fully taxable and penalized

Fully taxable but not penalized to the extent of the exception

Non-Deductible Traditional IRA

Earnings are taxable on a prorated basis

Prorated earnings are taxable and penalized

Prorated earnings are fully taxable but not penalized to the extent of the exception

Roth IRA withdrawals follow a sequence starting with contributions and then earnings. The amounts are not prorated.

The penalty referenced in the table refers to the 10% early withdrawal penalty. There is a list of exceptions which are listed in IRS Publication 590b and we could review those as part of your plan.

Prorated earnings refers to the calculation that is done to return a portion of your non-deductible contributions with your withdrawal. BFP includes planning services for this to help, see below.

Here are a few points from the summary above:

1) An individual who wants to save for retirement and reduce their income taxes with a contribution deduction won’t accomplish their goal by using a Roth account.

2) Vice versa an investor who wants tax free withdrawals of earnings in retirement won’t get that with any other IRA than a Roth.

3) Lastly, not everyone is eligible to make a Roth IRA contribution or a deductible Traditional IRA contribution.

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