Retirement / IRA

Traditional IRA: what is actually deductible

A traditional IRA is only worth more than a Roth if the deduction is real and the tax rate is lower at withdrawal. Above the phase-out the contribution is still allowed, but it is made with after-tax money inside an account that taxes the growth on the way out — which is the worst of both. This computes the deduction, the growth and the comparison.

Limit$7,000Deductible share0%Effective tax at withdrawal17.9%

Deductible this year

of the $7,000 limit

Tax saved now

at 22%

Traditional, after tax

$31,174

$37,992 less tax on withdrawal

Roth advantage

$6,818

the Roth wins

The contribution, line by line

The deduction is the whole point of the traditional account, and it disappears at a threshold.

0% deductible

The contribution, line by line
Step	Amount	Rule
Contribution limit	$7,000	under 50, no catch-up
Deductible portion	$0	§219(g) phase-out, 0% allowed
Non-deductible portion	$7,000	after-tax money inside a pre-tax wrapper
Tax saved now	$0	22% marginal rate
Balance at retirement	$37,992	25 years at 7.0%
Tax on withdrawal	$6,818	22% on the taxable part
After-tax value	$31,174	what the household actually keeps
Same outlay in a Roth	$37,992	funded with the after-tax equivalent
Difference	$6,818	Roth ahead

When the marginal rate is the same going in and coming out, the two accounts are identical — the deduction and the tax on withdrawal cancel exactly. The Roth wins when the rate is higher at retirement, which is the common case for someone in the 22% bracket today.

Deductible share against income

A straight line between the two thresholds — that is what a phase-out is.

Roth advantage against income

Once the deduction is gone the Roth wins by exactly the tax on the growth.

Canonical equations

The exact relationships implemented by this engine.

1 − (MAGI − start)/(end − start) · Linear phase-out, §219(g).

C × (1 + r)^n · Contribution compounded to retirement.

D·(1+r)^n + N·((1+r)^n − 1) · Deducted part plus growth on the rest.

C(1 − t_now)(1+r)^n · Funded with the same after-tax outlay.

Show model notation and computationOpen the symbolic form, the variable definitions, and the step-by-step derivation when you need the detail.

A clear path from inputs to results.

Step-by-step methodWorked exampleAssumptions explained

Worked example

$7,000 contributed at $60,000 and at $100,000 of MAGI

Inputs

Age 40, single, covered by a workplace plan.
Marginal rate 22% now and at retirement, 25 years, 7% growth.
MAGI of $60,000, then $100,000.

Calculation path

1
At $60,000 the phase-out has not started, so the full $7,000 is deductible and saves $1,540 of tax.
2
The balance grows to $37,992 over 25 years.
3
The whole balance is taxable on withdrawal, leaving $29,634 after 22% tax.
4
A Roth funded with the same after-tax $5,460 also ends at $29,634 — identical, because the rates match.
5
At $100,000 nothing is deductible: the traditional ends at $31,174 after tax on the growth, and the Roth at $37,992.
6
The Roth advantage at that income is $6,818, which is exactly 22% of the growth.

Result

$1,540 saved at $60,000 · identical outcome · $6,818 Roth advantage at $100,000.

Interpreting the result

The identity at equal rates is the thing to understand: a deduction now and tax later cancel exactly, so the traditional account is not a tax saving, it is a tax deferral. It only wins when the rate at withdrawal is lower, which is the usual case for someone in a high bracket today and a lower one in retirement.

Assumptions & limitations

Contribution limit $7,000 plus $1,000 from age 50.

Phase-out applies only when a workplace plan covers you for any part of the year.

The non-deductible portion is recovered tax-free under the §72 basis rules; only its growth is taxed.

State tax, the saver’s credit and Roth conversions are not modelled.

Frequently asked questions

Why is the Roth identical when the rates match?

Because the deduction is a deferral, not a gift. Taxing $7,000 at 22% now and the whole balance at 22% later gives the same after-tax result as taxing only the after-tax $5,460 now and nothing later.

Can I contribute to both a traditional and a Roth IRA?

Yes, but the $7,000 limit is shared between them, and the same limit applies across all your IRAs.

Is the deduction worth it if I am in the 12% bracket?

Usually not — the deferral is small and the flexibility of a Roth is worth more. The traditional deduction is most valuable at 22% and above.

What if I am not covered by a workplace plan?

Then the contribution is fully deductible at any income. The phase-out only exists because the deduction is meant to prevent double-dipping with an employer plan.

What happens if I contribute more than I can deduct?

The excess is a non-deductible contribution, which is allowed but requires Form 8606 and creates basis that has to be tracked for the rest of the account’s life.