Even if you can't deduct your IRA contributions, you can still make contributions to that account. With a non-deductible IRA, you can't claim an immediate tax deduction, but your money increases with deferred taxes. Your ability to fund different types of IRAs is subject to restrictions based on your income, your tax-filing status, and your eligibility to participate in an employer-sponsored retirement plan, even if no contribution has been made to the plan in a given tax year. Any money that contributes 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.If your income excludes you from the Roth option, you can simply contribute to a non-deductible IRA and then convert it to a Roth IRA.
In a given tax year, as long as you or your spouse have sufficient earned or self-employment income, each of you can contribute to an 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). However, if you're thinking about depositing your money in a long-term, non-deductible IRA, it's important to weigh the risks. Here are 5 reasons to consider saving on a taxable brokerage account instead of making non-deductible IRA contributions.
Keep in mind that you can still contribute money to an IRA in these situations and that your earnings will continue to increase tax-free. 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. 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. When you turn 72, the IRS requires you to add up the value of all your deductible and non-deductible IRAs and begin receiving distributions from your traditional (but not Roth) IRAs.
Many people who don't qualify to fully fund a deductible IRA or a Roth IRA miss out on this easy opportunity to save additional money for retirement, allowing them to grow tax-free. And unlike a Roth IRA, deductible and non-deductible IRA contributions can be combined in the same account. 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.