Many people who don't qualify to fully fund a deductible IRA or a Roth IRA overlook this easy opportunity to save additional money for retirement, where they can grow tax-free. In addition, unlike a 401 (k) plan or other wage deferral plan, you can make contributions to a non-deductible IRA until the tax-filing deadline. You can contribute to a traditional or Roth IRA even if you participate in another retirement plan through your employer or company. However, you may not be able to deduct all of your traditional IRA contributions if you or your spouse participate in another retirement plan at work.
Contributions to the Roth IRA may be limited if your income exceeds a certain level. 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 your income excludes you from the Roth option, you can simply contribute to a non-deductible IRA and then convert it to a Roth IRA.
The limit applies whether you contribute to a Roth IRA or a traditional IRA and whether your contributions are deductible or not. In this case, it often makes sense to make a contribution to a Roth IRA instead of a contribution to a non-deductible IRA. However, you can still contribute to a Roth IRA and make cumulative contributions to a Roth or traditional IRA regardless of your age. If you still want to keep your IRA contributions non-deductible without converting them immediately, you should keep that cash separate from any IRA that has pre-tax contributions, O'Mara said.
You can't deduct any of them, but savings taxes are deferred with a standard IRA. You'll pay taxes on that money later on, while your Roth IRA savings grow tax-free. In a Roth conversion, pre-tax IRA dollars are taxable income for the year, which converts money into Roth dollars. In a Roth 401 (k) plan, employees contribute after-tax money to a designated Roth account within the 401 (k) plan.
Contributing to a non-deductible IRA on the way to a clandestine Roth conversion could be a great way to protect some or all of your retirement savings from taxes. For example, since you've already paid income taxes on this money, you can usually convert it into a Roth IRA, where profits increase tax-free. In addition to the general contribution limit that applies to both Roth and traditional IRAs, your contribution to the Roth IRA may be limited depending on your marital status and income. In a clandestine Roth, investors make a non-deductible contribution to a traditional IRA and then quickly convert it to a Roth IRA.
You may still be able to save on a Roth IRA if you're covered by an employer-sponsored 401 (k) account and your income exceeds the limits of a regular IRA deduction.