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Chapter 21. No 401(k)? No Problem! > Nondeductible IRAs - Pg. 219

No 401(k)? No Problem! 219 Many mutual fund companies offer consumers help in calculating the benefits of the Roth IRA against an ordinary IRA. And everyone is offering advice on whether it is a good idea to pay the taxes and convert an ordinary IRA to a Roth IRA. Seek some professional help before you make such a decision; it is possible to reverse your conversion under certain circumstances, but it isn't exactly easy to accomplish. Individuals under 40 with reasonably sized IRAs may want to consider the rollover into a Roth IRA. Certainly, young savers will benefit the most from the Roth IRA because they will have years in which to accumulate wealth. Let's look at the numbers and forget the time value of money here for a moment. If you are in the 28 percent tax bracket, you will save $280,000 in income taxes when you withdraw the funds. You would have contributed $84,000 over the years of after-tax money, and the tax that you would have paid on that would be about $23,000. If it had been a deductible IRA, you would have saved the $23,000 in taxes. That's not a bad deal. What was it we said about those guys in D.C. having a heart? Nondeductible IRAs Nondeductible IRAs have not disappeared. Taxpayers who don't qualify for the deductible IRA or the Roth IRA may still make contributions to a nondeductible account. Contribution limits are the same as those for deductible and Roth IRAs. The earnings are still tax-deferred, and only the earn- ings are taxed as ordinary income when withdrawn from the account. The law allows penalty-free withdrawals before age 59½ if the money is used for first-time home purchases or for qualifying higher-education expenses. At the beginning of the chapter, we promised you the original IRA, the spousal IRA, the Roth IRA, and nondeductible IRAs, didn't we? Well, now you've read about all four, and perhaps you wish that Congress, in its wisdom, had not offered so many choices. The following figure compares these choices to help you decide which one of the IRAs best fits your situation.