Understanding Non-Deductible IRA And, unlike a Roth IRA, deductible and non-deductible IRA contributions can be combined in the same account. 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. The main difference between a non-deductible IRA and a traditional or Roth IRA is that you can contribute to a non-deductible IRA no matter how much you earn. Roth and traditional IRAs, on the other hand, are subject to strict income limits.
Once your income reaches a certain level, the eligibility to contribute gradually starts to disappear and then disappears completely. This doesn't happen with a non-deductible IRA. Let's start with the way they are similar. Neither a non-deductible IRA nor a Roth IRA allow you to deduct taxes for your contribution.
So, in both cases, you're investing after-tax dollars. A traditional deductible IRA is the most common type and is probably what most people consider an IRA. However, basically, if you're looking for a place to store your long-term retirement savings, I can't think of a good reason to make a non-deductible IRA if you can do a traditional IRA or a Roth IRA. When you're eligible for RMD, the IRS will require you to start using IRAs (excluding Roth IRAs) and eligible retirement plans (e.g., Roth IRA income withdrawals are tax-free if you've had a Roth account for at least five years and are 59 and a half or older or eligible for an exception).
First, they contribute to a traditional IRA (which has no income limits) and then convert that IRA into a Roth one. Non-deductible IRAs don't offer the income tax-exempt withdrawals offered by a Roth IRA or a Roth 401 (k). While a non-deductible IRA isn't as restrictive in terms of eligibility, it also doesn't offer the same tax benefits as a traditional or Roth 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 IRA savings are comprised entirely of non-deductible IRAs, you can convert them to a Roth IRA relatively easily. If you want to contribute to a Roth IRA and your income is too high to do so, using a non-deductible IRA will also allow you to benefit from the favorable tax rules associated with a Roth IRA. If you have a non-deductible IRA, you can convert it to a Roth IRA and enjoy the benefits of the Roth, such as tax-free withdrawals and the absence of mandatory minimum distributions (RMDs) during your lifetime. There is also a very good explanation of the ins and outs of Roth IRAs in the Roth IRA Guide at Fairmark headquarters.
You can contribute to a non-deductible IRA and then convert to a Roth IRA to deposit money into the tax-advantaged account. 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. 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. A traditional non-deductible IRA is obtained when contributions to a traditional IRA (TIra) are not deducted on a taxpayer's tax return.
