Contributions to a non-deductible Individual Retirement Account (IRA) are an important option for retirement savings. You may not be able to deduct contributions to a traditional IRA from your taxable income if your income exceeds certain levels. The contribution limit may also be capped, but you can still save for retirement through non-deductible contributions.
Non-Deductible IRA Contributions
Non-deductible IRA contributions provide a way to save for retirement without deducting them from your taxable income. You can defer taxes on the earnings and growth of your savings, just as you can with the rest of the funds you’ve saved there. However, your non-deductible contributions will not reduce your taxable income in the year you make them.
Allowed Contribution Limits for Individual Retirement Accounts
The rules for contributing to IRAs are complex and adjust with inflation. It’s a good idea to review them annually. You can contribute a combined total of $7,000 to traditional IRAs and Roth IRAs in 2021 and 2022 if you are age 50 or older. You can contribute a combined total of $6,000 to traditional IRAs and Roth IRAs in 2021 and 2022 if you are age 49 or younger. These limits do not apply when transferring money from one account to another, or to deferred payments for qualified reservists.
Income Restrictions for Individual Retirement Accounts
You may not be able to deduct all that you save in a traditional IRA because you face certain income restrictions if you work for a company that offers a workplace retirement plan, such as a 401(k) or 403(b). This is true regardless of whether you choose to participate in the employer’s plan. These adjusted gross income (AGI) limits slightly increase each year to keep pace with inflation.
Roth IRA as an Alternative
You may still be able to save in a Roth IRA if you are covered by an employer-sponsored 401(k) plan and have income exceeding the allowable limits for deduction in a regular traditional IRA. Roth IRAs have much higher income limits.
Conclusion
Choosing the best approach for your savings can be an ongoing process. It can depend on your age, income, and retirement goals. Consult a professional to help you make the best decision to achieve tax-protected savings.
Frequently Asked Questions
How can you make a non-deductible IRA contribution?
Use IRS Form 8606 to report non-deductible IRA contributions for the year when you file your annual tax return.
What is the limit for non-deductible IRA contributions?
The maximum amount you can contribute to all of your IRAs is $6,000 per year ($7,000 if you are age 50 or older) or your total taxable income, whichever is less. The limit applies whether you are contributing to a traditional IRA or a Roth IRA, and whether your contributions are deductible or not.
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Sources:
Internal Revenue Service. “Topic No. 451 Individual Retirement Arrangements (IRAs).”
Internal Revenue Service. “Publication 590-B: Distributions From Individual Retirement Arrangements (IRAs) (2020), Pages 15-18.”
Internal Revenue Service. “Retirement Topics—IRA Contribution Limits.”
Internal Revenue Service. “Are You Covered by an Employer’s Retirement Plan?”
Internal Revenue Service. “2022 Limitations Adjusted as Provided in Section 415(d), Etc., Page 3.”
Internal Revenue Service. “2022 Limitations Adjusted as Provided in Section 415(d), Etc., Page 4.”
Internal
Revenue Service. “2021 IRA Deduction Limits – Effect of Modified AGI on Deduction If You Are Covered by a Retirement Plan at Work.”
Internal Revenue Service. “2022 IRA Contribution and Deduction Limits Effect of Modified AGI on Deductible Contributions If You ARE Covered by a Retirement Plan at Work.”
Internal Revenue Service. “IRA Deduction Limits.”
Internal Revenue Service. “Amount of Roth IRA Contributions That You Can Make for 2021.”
Source: https://www.thebalancemoney.com/non-deductible-ira-contributions-2894488
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