A nondeductible IRA is just a traditional IRA funded by nondeductible contributions. But unlike a traditional IRA, nondeductible contributions come out tax-free in retirement. High-income earners often use a nondeductible IRA as a steppingstone to a Roth IRA.
What Is a Nondeductible IRA and How Does It Work?
A nondeductible IRA is a way for high-income earners to save additional money for retirement.
There are no income limits on who can make nondeductible IRA contributions.
While you can’t deduct these contributions to lower your yearly tax bill like you can with a traditional IRA or a 401(k) plan, a nondeductible IRA offers some attractive tax advantages when you start withdrawing money during retirement.
First, any investment gains made within the account are tax deferred, so you won’t owe tax on this part of your account until you start making withdrawals after the age of 59.5.
But unlike a traditional IRA, any money you originally contributed to the account comes out tax-free because you didn’t take a deduction when you put it in.
Let’s say you made $50,000 worth of nondeductible contributions to a traditional IRA in the decade before retirement. Over a 10-year period, your investments grew by $8,000. Your total account balance is now $58,000.
You’ll eventually owe taxes on the $8,000 in gains, but not on your original $50,000 in contributions.
You must use IRS Form 8606 to report nondeductible contributions made to traditional IRAs.
What Are the Eligibility Requirements for a Nondeductible IRA?
Anyone can make contributions to a nondeductible IRA so long as they have earned income. But just because you can, doesn’t mean you should choose a nondeductible IRA over other retirement saving options.
Since nondeductible IRAs don’t offer the same tax benefits as other plans, you typically should only choose a nondeductible IRA if you don’t qualify for other retirement accounts.
You may also want to contribute to a nondeductible IRA if you hit your annual limit for contributions to your 401(k) or similar employer plan. The IRS adjusts the limit annually. It is $20,500 in contributions for 2022.
If you have access to an employer plan, then your eligibility to contribute to a nondeductible IRA will phase out if your modified adjusted gross income (MAGI) reaches certain levels. These limits depend on your filing status and access to a workplace plan.
|Filing Status||Phase-Out Range|
|Single||$68,000 to $78,000|
|Married, filing jointly||$109,000 to $129,000|
|IRA contributor not covered by workplace plan, but is married to someone who is||$204,000 to $214,000|
|Married, filing separately and covered by a workplace plan||$0 to $10,000|
To determine your eligibility, you can use the IRA Worksheet in the IRS Form 1040 instructions.
Pros & Cons of Nondeductible IRAs
As with any retirement plan, there are pros and cons to nondeductible IRAs.
For instance, nondeductible IRAs can be an option for people who may not qualify for more traditional retirement savings plans. But they also require that you do much of the record keeping yourself.
- Allows you to contribute more than law allows in your current retirement plans
- Withdrawals are tax free
- Can continue making contributions at any age so long as you meet IRS rules
- No income limits on who can contribute
- No immediate tax benefit since contributions are made after tax dollars
- You must keep track of your contributions, so you are not taxed on withdrawals
- Must file IRS Form 8606 with your tax return each year you contribute
- Penalties if you withdraw money before you turn 59½
What Are the Contribution Limits with a Nondeductible IRA?
Nondeductible IRAs are subject to the same contribution limits as other IRAs.
The contribution limit for a nondeductible IRA is $6,000 in 2022. If you are 50 or older, you can make an additional catch-up contribution of $1,000. You and your spouse can each contribute to an IRA if you both are eligible to contribute to a nondeductible IRA.
You can also make contributions to different types of IRAs — nondeductible, tax deductible or Roth IRA — in the same year. But the combined total of your contributions cannot exceed that $6,000 limit — and $1,000 catch-up limit if you qualify.
Is a Nondeductible IRA Right for You?
A nondeductible IRA makes the most sense for people who are unable to enjoy the tax advantages of other individual retirement accounts because of income, filing status or eligibility requirements.
For example, you cannot contribute to a Roth IRA if your modified adjusted gross income exceeds $140,000 as a single filer or $208,000 as a married filer in 2021.
With that option eliminated, you may consider a traditional IRA.
If neither you nor your spouse has access to a retirement account at work, you are free to open a traditional IRA.
You’ll be able to contribute the maximum $6,000 a year — or $7,000 a year for people ages 50 and up. You can also deduct contributions from your yearly taxes.
However, if you or your spouse have access to a 401(k) plan or similar employer-sponsored account and you earn too much to contribute to a Roth IRA, you also earn too much to deduct contributions to a traditional IRA.
- If you have access to a workplace retirement plan and have a modified adjusted gross income higher than $76,000 in 2021 as a single filer — or more than $125,000 as a married filer — you cannot deduct contributions to a traditional IRA.
- If your modified adjusted gross income exceeds $140,000 as a single filer in 2021 — or $208,000 as a married filer — you cannot contribute to a Roth IRA.
If either of these situations applies to you, making nondeductible IRA contributions may be a good option.
Converting to a Backdoor IRA
Deferring taxes on your IRA investment gains is nice — but what if you could avoid those taxes completely?
Enter a backdoor IRA.
If your income locks you out of a Roth IRA, you can simply contribute to a nondeductible IRA and then convert to a Roth.
It’s a legal way for high-income earners to reap additional tax benefits.
Roth contributions are made with after-tax dollars. When you convert nondeductible IRA contributions to a Roth, you’re also converting after-tax dollars.
Once the conversation is completed, any investment gains within the account can be withdrawn as a qualified distribution tax free.
- Open a new traditional IRA.
- Make nondeductible contributions to it.
- Convert it into a Roth IRA.
If you want to convert a nondeductible IRA to a Roth IRA, it’s best to do so quickly. Otherwise, the nondeductible contributions inside your IRA can accumulate investment gains — and you’ll owe tax on that growth if you convert to a Roth IRA.
Most brokerages can help you handle a backdoor Roth IRA conversion.
Check with your IRA providers to learn more about specific paperwork and requirements.
13 Cited Research Articles
- Internal Revenue Service. (2022, March 3). About Form 8606, Nondeductible IRAs. Retrieved from https://www.irs.gov/forms-pubs/about-form-8606
- Internal Revenue Service. (2022, January 03.). IRA FAQs. Retrieved from https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras
- Marquit, M. (2021, December 22). What Is a Backdoor Roth IRA? Retrieved from https://www.forbes.com/advisor/retirement/backdoor-roth-ira/
- Internal Revenue Service. (2021, November 5). Roth IRAs. Retrieved from https://www.irs.gov/retirement-plans/roth-iras
- U.S. Internal Revenue Service. (2021, November 4). IRS Announces 401(k) Limit Increases to $20,500. Retrieved from https://www.irs.gov/newsroom/irs-announces-401k-limit-increases-to-20500
- Internal Revenue Service. (2021, October 26). 2021 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are NOT Covered by a Retirement Plan at Work. Retrieved from https://www.irs.gov/retirement-plans/2021-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-not-covered-by-a-retirement-plan-at-work
- Internal Revenue Service. (2021, October 26). 2021 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work. Retrieved from https://www.irs.gov/retirement-plans/2021-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work
- Marquit, M. (2020, December 14). What Is A Backdoor Roth IRA? Retrieved from https://www.forbes.com/advisor/retirement/backdoor-roth-ira/
- Internal Revenue Service. (2020, November 16). 2021 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are NOT Covered by a Retirement Plan at Work. Retrieved from https://www.irs.gov/retirement-plans/2021-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-not-covered-by-a-retirement-plan-at-work
- Internal Revenue Service. (2020, November 16). 2021 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work. Retrieved from https://www.irs.gov/retirement-plans/2021-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work
- Internal Revenue Service. (n.d.). IRA FAQs. Retrieved from https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras
- Internal Revenue Service. (2020, November 10). Roth IRAs. Retrieved from https://www.irs.gov/retirement-plans/roth-iras
- Internal Revenue Service. (2020, September 23). About Form 8606, Nondeductible IRAs. Retrieved from https://www.irs.gov/forms-pubs/about-form-8606