What's the Difference Between a Deductible IRA Contribution and a Non-Deductible IRA Contribution?

You can contribute to a traditional IRA whether or not you can deduct the contribution, but the tax treatment is very different depending on which situation you're in. A deductible IRA contribution reduces your taxable income in the year you contribute, giving you an immediate tax break — the money grows tax-deferred, and you pay income tax on the full amount when you withdraw it in retirement. A non-deductible IRA contribution is made with after-tax money, so you get no upfront deduction, but your original contribution amount (the basis) comes back out tax-free when you withdraw it. However, any growth in a non-deductible IRA is taxable upon withdrawal, making it less efficient than a Roth IRA, which offers tax-free growth for after-tax contributions. You can only deduct traditional IRA contributions if your income falls below certain limits and you (or your spouse) don't have an employer-sponsored retirement plan, or if you meet specific income thresholds even with a workplace plan.