Is A Non-Deductible IRA Worth It?

Not everybody can make deductible IRA contributions. But just because you aren’t able to claim a tax deduction for your IRA contribution in 2015, does that mean you should forget about the nondeductible IRA? Not necessarily. As you’ll see, it depends on your situation.

First, let’s discover who is able to have a deductible IRA and who isn’t. Then we’ll consider the value of a non-deductible IRA.

Who Can Make A Deductible IRA Contribution?

Remember, just about anyone who has earned income can make an IRA contribution but you could be limited when it comes to taking the deduction for that contribution.

Tax Deductible Contribution Limits

In 2016, if neither you nor your spouse have a retirement plan at work you can make tax deductible contributions to your IRA. But if either of you have a plan at work, the tax deductibility of that contribution phases out as your income rises.

Notice, it doesn’t matter to Uncle Sam if you take advantage of the plan at work or not. Even if you don’t contribute to a plan your IRA contribution deductions are limited. Sad. Very sad.

If you are single or head of household and you have a plan at work, the phase-out of your IRA deduction begins if your Adjusted Gross Income exceeds $61,000 and is completely gone if your AGI hits $71,000.

If you are a married couple and file jointly the phase out is a bit tricky. If you are the one who has a plan at work, your deduction phase out is from $98,000 to $118,000. If your spouse has the plan at work and you don’t have one, your IRA deduction phases out from AGI of $183,000 to $193,000 in 2015.

But if you are married filing a separate return and you have a plan at work, you are going to be very unhappy. The phase-out is from $0 to $10,000. That’s harsh.

How Much Can You Contribute?

IRA contribution limits (deductible or not) are capped at $5500 or $6500 if you are 50 years old or greater.

Should You Make A Non-Deductible IRA Contribution?

Not if you have better options.  If you can make a deductible IRA contribution or a deductible contribution to a retirement plan at work, that’s almost always a better choice. But if you don’t have that option, the non-deductible contribution has some benefits.

First, the earnings on the non-deductible IRA still grow tax-deferred and you can defer all those distributions until age 70 ½. That means as long as you keep your money in the plan you can buy and sell holdings as you wish and you’ll never have to worry about incurring a capital gains liability.

And there’s more good news. When you make withdrawals, part of that money is tax-free. That’s because you won’t be taxed on your contributions – only on the earnings.

But you have to keep good records and be careful not to combine a regular IRA and non-deductible IRA. If you do mix them up you’ll face an accounting nightmare.

Roth IRA Compared to Non-Deductible IRA

From every angle possible, the Roth is better than a non-deductible IRA.

With the Roth you also lose the deduction when you make your contributions but all withdrawals (including earnings) can be withdrawn tax-free. That’s a very spicy meatball Pilgrim.

Of course, with the Roth you are limited by your MAGI (Modified Adjusted Gross Income). If you are single and your MAGI exceeds $129,000 no Roth for you friend. Same story for married couples filing jointly with MAGI of $191,000 or more.

The world of non-deductible IRAs isn’t that complicated. It’s certainly better than no retirement plan but usually it’s your last choice after a deductible retirement plan contribution or a Roth contribution.

Are you making non-deductible IRA contributions this year? Why?