With a Roth IRA, you don't get any tax deductions for the money you deposit, but your earnings are still tax-free and you generally don't pay taxes on the distributions of what you invest or on profits. A simplified employee pension, or SEP-IRA, is a traditional IRA set up for an employee by an employer. If you have a non-deductible IRA, you can convert it to a Roth IRA or even consider investing in a Gold IRA. Gold IRA Investments offer the same tax benefits as a Roth IRA and you won't have to pay taxes on your account contributions, but account earnings will be taxable at the time of conversion. If you have both deductible and non-deductible IRAs, you must prorate the taxable and non-taxable portions to determine what part of your conversion is taxable.
With a Roth, on the other hand, you don't pay taxes on any part of your withdrawals, including profits. Which means you're getting a completely tax-free return. That gives Roth a big advantage, no, it's HUGE, over a non-deductible IRA. And by the way, limits are the maximum you can contribute to all types of IRAs combined in a single year, which unfortunately means that you can't contribute as much as you can to a Roth IRA, a deductible IRA and a non-deductible IRA.
A traditional IRA with a deductible is the most common type and is probably what most people consider an IRA. However, if you're thinking about parking your money in a long-term, non-deductible IRA, it's important to weigh the risks. For many people, especially those with higher incomes, a non-deductible IRA is just a stop on the road to converting those funds into a Roth IRA, through a “clandestine” Roth IRA. You can (and should) file Form 8606 for each year you make after-tax contributions to a non-deductible IRA.
Many people use these options because their incomes are too high for the IRS to allow them to make tax-deductible contributions to a regular IRA. A clandestine Roth IRA refers to a two-step maneuver that people with high incomes can use to get around the income limits of Roth IRAs. The Internal Revenue Service (IRS) prohibits anyone with excessive income from deducting their traditional IRA contribution. The good news for workers is that regardless of their earned income, they can always contribute to a non-deductible IRA and receive tax-deferred growth, even though they won't be able to contribute pre-tax funds.
However, most commonly, higher-income workers access financial advisors' favorite retirement account, the Roth IRA. 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. There is also a very good explanation of the ins and outs of Roth IRAs in the Roth IRA Guide on the Fairmark website. First, they contribute to a traditional IRA (which has no income limits), and then they convert that IRA into a Roth.
People who contribute to a non-deductible IRA usually do so because their income is too high to be able to contribute to a Roth IRA or deduct their contributions to a traditional IRA. However, basically, if you're looking for a place to store your savings for long-term retirement, I can't think of a good reason to create a non-deductible IRA if you can create a traditional IRA or a Roth IRA. You can use a non-deductible IRA to enjoy the growth of a tax-deferred investment if you can't take advantage of the deductibility of a traditional IRA.
