Often, a non-deductible IRA is just a stopover on the flight of taxable income to a Roth IRA. Like traditional IRAs, Roth IRAs have income limits. Non-deductible IRAs are subject to the same contribution limits as other IRAs. Your ability to fund different types of IRAs is subject to restrictions based on your income, filing status, and eligibility to participate in an employer-sponsored retirement plan, even if no contributions have been made to the plan in a given fiscal year.
Learn what they are, how they work, eligibility requirements, contribution limits and their advantages and disadvantages. The tax rate of this part shall be the current ordinary income tax rate at the time of conversion. Non-deductible IRAs can be useful for those whose adjusted gross income (AGI) is too high to make contributions to the Roth IRA. Between the ages of 59 and a half and age 72, you are free to withdraw any amount from your IRA without penalty, but you are not required to do so.
Specifically, if you earn too much to contribute to a Roth IRA, you will most likely not be eligible to deduct contributions to a traditional IRA either. The IRS recommends keeping your Forms 1040 and 8606, as well as the Form 5498 you receive each year from the IRA custodian to document your contributions and distributions. Non-deductible IRAs lack many of the advantages of a traditional IRA or Roth IRA, but they are useful when investors want to save more for retirement than current limits for deductible IRAs allow. Another common misconception is that you can only convert your non-deductible IRA contributions into a Roth.
The deductibility of IRA contributions is phased out depending on tax status, income (specifically modified adjusted gross income) and whether or not the investor is eligible to participate in a retirement plan at work. Each spouse can make a contribution up to the current limit; however, the total of their combined contributions cannot exceed the taxable compensation reported on their joint return. If neither you nor your spouse has access to a retirement account at work, you are free to open a traditional IRA. You can make a contribution to a non-deductible IRA each year and then convert it to a Roth IRA using the backdoor approach.
Otherwise, non-deductible contributions within your IRA can accrue investment gains and you will have to pay taxes on that growth if you convert to a Roth IRA. A non-deductible IRA is a viable option if you do not meet the eligibility requirements and income limits established for traditional IRAs and Roth IRAs. If neither spouse participated in a retirement plan at work, all their contributions will be deductible.