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What is a Non-Deductible IRA?

Non-deductible IRAs are among the various ways you can save for your retirement. With non-deductible IRAs, the funds you contribute are not deducted from your taxes in the year you contribute. It isn’t the first line of defense for contributing to retirement accounts, but it may be the most suitable option for some, especially high-income earners.

Who should contribute to a Non-Deductible IRA?

Non-deductible IRAs are appropriate options for those who have taxable compensation, are covered by an employee sponsored retirement plan, and are ineligible to contribute to a Roth IRA due to income limits. In 2018, the income limits for Roth IRA contributions are as follows: 

How is it similar to a traditional IRA?

A non-deductible IRA is very similar to the traditional IRA in that you can contribute until you are the age of 70 ½, you can begin withdrawing without penalties once you are over the age of 59 ½, and you must begin taking the Required Minimum Distribution in the year you turn 70 ½. The contributions limits are also the same at $5,500 annually, or $6,500 if you are over the age of 50.

Why contribute if I can’t get a tax break?

If your earnings exceed these contribution limits and you are already contributing the maximum allowable amount to your employer sponsored retirement plan, you can still contribute to your retirement funds by making non-deductible contributions. Although the non-deductible contribution will not reduce your taxes in the year you make them, the earnings on that contribution are tax deferred, which is a key advantage of a regular IRA.  Additionally, if you’re already over the age of 59 ½, you can think of these contributions as an additional savings account since you will have access to withdraw them at any time without penalty.

Are there any drawbacks?

The contributions are non-deductible, so there is no immediate tax break. Additionally, a non-deductible IRA does require that we keep track of those non-deductible contributions since they are made “after tax.” The contribution amount needs to be accounted for to ensure that only the gains on these funds are taxed at the time of withdrawal.  One simple solution may be to open a separate Traditional IRA only for all your non-deductible contributions.

How can Tobias Financial Advisors assist with your Non-Deductible IRA Contributions?

Tobias Financial Advisors offers to review your situation to identify the advantages and benefits of making non-deductible IRA contributions. If this strategy is right for you, we will seek to invest in funds that will yield ordinary income to take advantage of the tax deferral and more importantly, avoid converting capital gains and preferential income into ordinary income. We will also help you keep track of these contributions, since it will need to be taken into consideration when you take a withdrawal.