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Using Non Deductible IRAs to Get Money Into a ROTH

Non Deductible IRA Rules You Can Use


If you are not eligible to take an IRA deduction for your contribution to an IRA, and you make too much money to make a ROTH IRA contribution, then you might consider making a non-deductible IRA contribution.

Non-Deductible IRA Basics

  • A non-deductible IRA has the same contribution limits and is subject to the same rules as a Traditional IRA – the difference is how the contribution is treated on your tax return.
  • You can make non deductible IRA contributions to the same IRA account that has deductible contributions, however, for tracking purposes I would advise you open a separate account for all non-deductible contributions.
  • With your tax return you will need to file a form 8606 where you report the amount of your IRA contribution that was non-deductible. This is called your basis.
  • One of the most effective uses of non-deductible IRAs is for high income earners. High income earners can use non-deductible IRAs to contribute to a ROTH IRA.

Using a Non-Deductible IRA Contribution to Contribute to a ROTH

For those who earn enough money that they are not eligible to make a ROTH IRA contribution, they can still contribute money to a ROTH IRA in a round-a-bout way. Each year you can make a non-deductible IRA contribution and then convert that non-deductible IRA to a ROTH.

When you convert an IRA to a ROTH IRA you pay taxes on any amount that is converted that is above your basis. If you have other IRA accounts your basis must be calculated using a pro-rata formula. For example, supposed you have $10,000 in a traditional IRA, and you made a $5,000 contribution to a separate IRA account as a non-deductible IRA. It would be nice if you could convert just the non-deductible IRA, however, the IRS would look at all your IRA accounts combined, and so if you converted the $5,000, one-third of it would be considered basis and the other two-thirds would be considered taxable income. This tax calculation is covered in length in the tax cost of converting a ROTH.

Non-Deductible IRA Mistakes

The most common mistake made with non-deductible IRAs is forgetting to complete IRS form 8606 with your tax return. If you have made non-deductible IRA contributions but did not report your basis, you can report it in arrears. See I forget to file form 8606 for details on what to do.

Another common mistake is thinking you can convert only your non-deductible IRA contributions to a ROTH. As discussed above, you have to look at the total of all your IRA accounts when determining the amount of tax owed when you convert to a ROTH. You can get around this by rolling traditional IRA balances into an employer plan, like a 401k plan, leaving only your non-deductible IRA balances outside of the plan. The IRS asks for year-end account balances so you would need to roll traditional IRAs into a 401k plan before year end. Then the following year convert non-deductible IRAs to a ROTH. Learn more in The Backdoor ROTH IRA.

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