Generally, you should use a non-deductible IRA only if you don't qualify for access to other retirement accounts because it doesn't offer the same tax advantages as other accounts. To determine if you're limited to a non-deductible IRA, start by calculating your modified adjusted gross income (MAGI). Non-deductible IRAs that quickly convert to Roth IRAs can be great. Permanent, non-deductible IRAs, on the other hand, carry some risks.
One of the biggest risks is that you may have to pay additional taxes if you don't keep deductible and non-deductible contributions separate. That's because once you've combined deductible and non-deductible contributions, it's hard to keep both in order. This is because Roth IRA distributions are tax-exempt, as long as you are at least 59 and a half years old at the time of retirement and the Roth IRA has been in effect for at least five years. Millions of investors are converting other retirement balances, including traditional IRAs, into Roth IRAs.
So, if the benefit of a contribution to a traditional IRA is the immediate tax deduction, why would someone contribute after-tax money to an IRA without any deductions? Generally, there are two viable reasons to make non-deductible contributions to the IRA. When you qualify for the RMD, the IRS will ask you to start using IRAs (excluding Roth IRAs) and eligible retirement plans (e.g., contributing to a non-deductible IRA for a clandestine conversion to Roth could be a great way to protect some or all of your retirement savings from taxes). A Roth IRA would alleviate most problems related to after-tax contributions, but wealthy taxpayers may need to consider converting to Roth, as there are income limits to participating regularly. Both will grow with deferred taxes, but while the “base” of a deductible IRA is zero, you may find it easier to track the “base” of the non-deductible IRA if the accounts are separate.
So, if you think there will be a substantial amount left in your IRA after you die, it may not make sense to refill it even more with after-tax contributions. While some contributions to an IRA may not be tax-deductible, there are other reasons to contribute to an IRA. While a non-Roth addition to an after-tax IRA may not be the best option, there are other ways to save for retirement and your other goals. 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.