Entrust Learning Center > IRA Insights > May IRA Insights: Non-Deductible Contributions to Traditional IRAs

May IRA Insights: Non-Deductible Contributions to Traditional IRAs

However, there is good reason to contribute non-deductible amounts to your Traditional IRA, especially if your income keeps you from qualifying for a Roth IRA.

By: Carl Fisher

IRA Insights

By: Carl Fischer

I wondered why anyone would make a non-deductible contribution to a Traditional IRA or tax-deferred account. It's true, that all the earnings made by those contributions can be tax-deferred until you take distributions. It's also true you will be able to withdraw or distribute the non-deductible amounts in the future tax-free. Prior to the law changes in 2006, I would have said non-deductible contributions are not worth the trouble.

However, there is good reason to contribute non-deductible amounts to your Traditional IRA, especially if your income keeps you from qualifying for a Roth IRA. The reason, in 2010, the income limitations ($100,000 MAGI) for converting a Traditional IRA to a Roth IRA will be waived. As a result of law changes in 2006, anyone with a tax-deferred type IRA can convert to a Roth IRA and spread the conversion amounts and tax liabilities over two years (2011 and 2012). The non-deductible amounts that were contributed can be converted without being taxed based on the total pro-rata share being converted. Many Americans who were previously ineligible may now have Roth IRAs.

It is important that you file IRS form 8606 and keep track of the non-deductible amounts as they are prorated when withdrawn/distributed based on the total value of the IRA. Consult with your tax and financial planning professionals to determine the best approach for your situation.

Everyone, under 70½ years of age, who has earned income/compensation can contribute to a Traditional IRA. However, not everyone can have the contribution tax deductible. There are several reasons an IRA contribution may not be deductible; it is dependent on your tax filing status, income limitations, social security, and participation in an employer sponsored retirement plan. The following tables summarize the factors and provide guidance based on these factors:Effect of Modified AGI on deductions if you are covered by a retirement plan at work:

Valid for 2008- check IRS pub 590 for other details.

Effect of Modified AGI on deductions if you are NOT covered by a retirement plan at work:

Valid for 2008 - check IRS pub 590 for other details.

If you are not sure why you would want a Roth IRA, you should consult your accountant or other professional advisor. Also, remember to visit your local Entrust office and register for a seminar or workshop.

Carl Fischer is a Principal & Senior self-directed IRA administrator at EntrustCAMA,
a firm specializing in self-directed retirement funds with offices in Pennsylvania, New Jersey, Delaware, and West Virginia. For further information, contact Carl Fischer (866)559-4430.

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