Form 8606 for non-deductible contributions Any money that you contribute to a traditional IRA and that you don't deduct on your tax return is a “non-deductible contribution.” You must still declare these contributions on your return, and to do so, you must use Form 8606. Reporting them saves you money in the future. Non-deductible IRA contributions allow you to get around the Roth IRA's income limits. You can contribute to a non-deductible IRA and then convert to a Roth IRA or open a Gold IRA to deposit money into the tax-advantaged account. You can also make non-deductible contributions to a traditional IRA. These contributions don't reduce your income for tax purposes, but they will increase with deferred taxes until your retirement.
Contributions for which you don't request a deduction will be returned tax-free when you start withdrawing the money. In addition, regardless of your participation in a work plan, income that exceeds a certain threshold makes you ineligible at all to contribute to a Roth IRA. Your eligibility to deduct part or all of your IRA contributions from federal income tax depends on your income, your tax-reporting status, and whether you have access to an employment retirement plan (even if you don't participate in the plan). One of the best reasons to contribute to a non-deductible IRA is to take advantage of the opportunity to make clandestine contributions to a Roth IRA.
Non-deductible contributions to an IRA don't provide an immediate tax benefit because they're made with after-tax money, such as a Roth IRA. Remember that you can't invest money in a Roth IRA if your income is too high, but Roth IRAs are a valuable retirement savings tool, allowing you to increase your invested funds tax-free and withdraw your earnings as a retiree without paying taxes, as long as you follow certain rules. However, you can withdraw money contributed to a non-deductible IRA during retirement without paying taxes on it. You must decide how you want your IRA taxed if you forgot to request deductions from your IRA in previous years.
For example, you can make additions to a tax-deductible, non-deductible, or Roth IRA account in a given tax year, as long as the combined contributions do not exceed the limit. People who expect to be in a lower tax bracket during their retirement years usually make deductible contributions to the IRA and apply for tax relief before they retire. Generally, people prefer to make contributions to the Roth IRA if they expect to be in roughly the same tax bracket or in a higher tax bracket when they retire. Many people prefer to contribute to Roth IRAs rather than making non-deductible contributions to traditional IRAs.
However, your contributions to a non-deductible IRA are made with after-tax money, while your contributions to a traditional IRA or 401 (k) can be deducted in the year in which they are made. Then, you'll need to divide your non-deductible contributions by the total contributions to all the IRAs in your name to get a percentage that represents your after-tax contributions. Non-deductible IRAs don't offer the income tax-exempt withdrawals offered by a Roth IRA or a Roth 401 (k). Withdrawals are included in your taxable income when you start withdrawing money from your IRA when you retire, since they weren't taxable the first time you requested those deductions for your contributions.