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 only reason to consider making an after-tax contribution to a traditional IRA is tax-deferred growth. If you had invested your non-deductible contribution in a taxable brokerage account, you would have to pay taxes on interest, dividends, and capital gains distributions annually, even if you don't sell any shares. In a clandestine Roth, investors make a non-deductible contribution to a traditional IRA and then quickly convert it to a Roth IRA.
Once the money is in a Roth IRA, it's tax-free when you withdraw it (if you meet the age and retention period requirements). This strategy only works if you don't have any other traditional IRA. Otherwise, the apportionment rule applies. You may not be able to deduct traditional IRA contributions from your taxable income if your income exceeds certain levels.
The amount you can save may also be limited, but you can still save for retirement with contributions that you don't deduct. If you don't file, track and file the form, you'll lose the ability to protect part of the tax withdrawal from your IRA when you withdraw the money. However, if you also have traditional IRA assets, part of the converted funds must be included in your taxable income. 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.
If your income exceeds the maximum income limit, you can't deduct your IRA contributions. Unlike a traditional IRA, which is tax-deductible, non-deductible IRA contributions are made with after-tax money and don't provide any immediate tax benefits. If your income is below the limits, you have the right to request a tax deduction for your contributions to a traditional IRA. Your IRA depositary can send you a statement of how much you need to withdraw, but it's best to have it done by a tax advisor, who can also help you determine what part of your RMD is taxable if it includes non-deductible contributions.
However, your contributions to a non-deductible IRA are made with after-tax money, while your contributions to a traditional IRA or 401 (k) can be deducted in the year in which they are made. This is a general communication that should not be used as a basis for making any type of fiscal, financial, legal or investment decision. The IRS prorated rule applies to withdrawals from a traditional IRA, SEP or SIMPLE with tax-deductible and after-tax funds (non-deductible and not Roth). Between age 59 and a half and 72, you can withdraw any amount from your IRA without penalty, but you're not required to do so.
To find the tax-free dollar amount, multiply the tax-free percentage by the total amount of IRA distributions throughout the year. The IRS recommends keeping your forms 1040 and 8606, as well as the Form 5498 you receive each year from the IRA depositary to document your contributions and distributions. Anyone with earned income can make a non-deductible (after-tax) contribution to an IRA and benefit from tax-deferred growth. Because of ongoing tax filing and reporting requirements, the prorated rule, and other complexities, non-deductible IRA contributions aren't usually worth it.