Non deductable IRA Contributions

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Topic Author
Bully3000
Posts: 17
Joined: Mon Jan 07, 2019 4:23 pm

Non deductable IRA Contributions

Post by Bully3000 » Fri Jan 11, 2019 9:49 am

Hi, new to these forums and had some/ questions since I cannot figure out what I am doing exactly. :D

Gross $160k-$200k per year and file HOH

I started to do my taxes and noticed I do not qualify for a deduction on IRA contributions, I use an IRA at Betterment and used traditional since I exceed income to be able to contribute to a Roth.

How does making a non deductible contribution work since from what I read it tells me these contributions come out of the IRA tax free since i already paid tax so basically only pay tax on the earning portion which would make it some sort of a hybrid Roth/Traditional IRA am I understanding this correctly?

I need to read more on backdoor Roth conversions I guess also once I figure out any tax implications with these contributions,

Anyone have a better way of doing this or advice on the best approach?

livesoft
Posts: 64159
Joined: Thu Mar 01, 2007 8:00 pm

Re: Non deductable IRA Contributions

Post by livesoft » Fri Jan 11, 2019 9:52 am

Non-deductible contributions work as explained in IRS Publicatoin 590A.

You will need to file a Form 8606 with your tax return. Instructions and form are online. Tax prep software is pretty good at dealing with all this.

You need to understand what a Backdoor Roth IRA is ... even if you decide not to perform the transactions for one. See the wiki:
https://www.bogleheads.org/wiki/Backdoor_Roth

All this is really easy unless you start reading posts about it on bogleheads.org. Somehow posters make it more complicated than it is and confuse people.
Wiki This signature message sponsored by sscritic: Learn to fish.

Topic Author
Bully3000
Posts: 17
Joined: Mon Jan 07, 2019 4:23 pm

Re: Non deductable IRA Contributions

Post by Bully3000 » Fri Jan 11, 2019 9:55 am

livesoft wrote:
Fri Jan 11, 2019 9:52 am
Non-deductible contributions work as explained in IRS Publicatoin 590A.

You will need to file a Form 8606 with your tax return. Instructions and form are online. Tax prep software is pretty good at dealing with all this.

You need to understand what a Backdoor Roth IRA is ... even if you decide not to perform the transactions for one. See the wiki:
https://www.bogleheads.org/wiki/Backdoor_Roth

All this is really easy unless you start reading posts about it on bogleheads.org. Somehow posters make it more complicated than it is and confuse people.
The more I read the stupider i get.

mhalley
Posts: 6508
Joined: Tue Nov 20, 2007 6:02 am

Re: Non deductable IRA Contributions

Post by mhalley » Fri Jan 11, 2019 12:33 pm

I believe many people think it is not worth doing nondeductable Ira contributions if you can’t do the backdoor Roth. Instead, invest in a taxable account. At a minimum, you might want to put nondedectabke Ira contrubutions in a seperate account to make taxes easier.
From a motley fool article. https://www.fool.com/retirement/iras/20 ... assle.aspx
. In general, most people will find that nondeductible IRAs aren't worth the hassle. Especially with 401(k) plans and other employer-sponsored retirement options usually available, the nondeductible IRA is almost always the savings vehicle of last resort.

badger42
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Re: Non deductable IRA Contributions

Post by badger42 » Fri Jan 11, 2019 12:43 pm

If you aren't doing a backdoor Roth, the non-deductible IRA is almost certainly not worth the trouble. It might even cost you MORE in taxes than just investing in taxable in a tax efficient manner.

If you invest in taxable, most of your gains will be qualified dividends and/or capital gains, which are taxed at a lower rate, and for capital gains (assuming ETFs) you can decide when to realize those capital gains. You can also use losses to offset gains. There is tax drag (mostly due to dividends), but it's pretty manageable.

If you invest in a non-deductible IRA, your gains will be taxed as ordinary income. For most of us, assuming current tax rates, the capital gains rate in retirement will be 0% or 15% (with at least some years with substantial chunks of 0% where you can harvest gains). Ordinary income is likely to be quite a bit higher of a tax rate (again, assuming current law), and RMDs mean you don't necessarily fully control when to realize income. (assuming you don't withdraw and/or Roth convert before RMDs hit).

Topic Author
Bully3000
Posts: 17
Joined: Mon Jan 07, 2019 4:23 pm

Re: Non deductable IRA Contributions

Post by Bully3000 » Fri Jan 11, 2019 1:52 pm

badger42 wrote:
Fri Jan 11, 2019 12:43 pm
If you aren't doing a backdoor Roth, the non-deductible IRA is almost certainly not worth the trouble. It might even cost you MORE in taxes than just investing in taxable in a tax efficient manner.

If you invest in taxable, most of your gains will be qualified dividends and/or capital gains, which are taxed at a lower rate, and for capital gains (assuming ETFs) you can decide when to realize those capital gains. You can also use losses to offset gains. There is tax drag (mostly due to dividends), but it's pretty manageable.

If you invest in a non-deductible IRA, your gains will be taxed as ordinary income. For most of us, assuming current tax rates, the capital gains rate in retirement will be 0% or 15% (with at least some years with substantial chunks of 0% where you can harvest gains). Ordinary income is likely to be quite a bit higher of a tax rate (again, assuming current law), and RMDs mean you don't necessarily fully control when to realize income. (assuming you don't withdraw and/or Roth convert before RMDs hit).
The more I read about the backdoor Roth the less I am inclined to want to pursue it currently, Looks like will just up my taxable income if i am reading correctly? and non deductible contribution versus taxable and TLH look to be about a wash over 30 years.

Maybe just contribute to a taxable and designate for retirement but can also serve as a last layer of protection should i need to withdraw the money earlier than my planned retirement.

xenochrony
Posts: 56
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Location: California

Re: Non deductable IRA Contributions

Post by xenochrony » Fri Jan 11, 2019 2:22 pm

I contributed the max to a traditional IRA in 2018, however due to the income phaseout regulation for these contributions, about half is non-deductible. In my case, the best solution is to recharacterize the nondeductible traditional IRA contributions as Roth IRA contributions. This will allow them to be withdrawn tax free, furthermore, the growth on those contributions will also be withdrawn tax free. I dont believe a taxable account would afford such an opportunity.

xenochrony

NotWhoYouThink
Posts: 2120
Joined: Fri Dec 26, 2014 4:19 pm

Re: Non deductable IRA Contributions

Post by NotWhoYouThink » Fri Jan 11, 2019 2:28 pm

Bully3000 wrote:
Fri Jan 11, 2019 1:52 pm
badger42 wrote:
Fri Jan 11, 2019 12:43 pm
If you aren't doing a backdoor Roth, the non-deductible IRA is almost certainly not worth the trouble. It might even cost you MORE in taxes than just investing in taxable in a tax efficient manner.

If you invest in taxable, most of your gains will be qualified dividends and/or capital gains, which are taxed at a lower rate, and for capital gains (assuming ETFs) you can decide when to realize those capital gains. You can also use losses to offset gains. There is tax drag (mostly due to dividends), but it's pretty manageable.

If you invest in a non-deductible IRA, your gains will be taxed as ordinary income. For most of us, assuming current tax rates, the capital gains rate in retirement will be 0% or 15% (with at least some years with substantial chunks of 0% where you can harvest gains). Ordinary income is likely to be quite a bit higher of a tax rate (again, assuming current law), and RMDs mean you don't necessarily fully control when to realize income. (assuming you don't withdraw and/or Roth convert before RMDs hit).
The more I read about the backdoor Roth the less I am inclined to want to pursue it currently, Looks like will just up my taxable income if i am reading correctly? and non deductible contribution versus taxable and TLH look to be about a wash over 30 years.

Maybe just contribute to a taxable and designate for retirement but can also serve as a last layer of protection should i need to withdraw the money earlier than my planned retirement.
I think you are being told just the opposite. Back door Roth doesn't up your taxable income at all. Your contribution to a non-deductible IRA doesn't save you any taxes, so it doesn't cost you any taxes to convert to a Roth. Also, gains in a non-deductible IRA are taxed at ordinary income rates. Gains in a Roth are not taxed ever. Gains in a taxable account are taxed at capital gains tax rates, which are generally lower than ordinary income rates.

rkhusky
Posts: 6059
Joined: Thu Aug 18, 2011 8:09 pm

Re: Non deductable IRA Contributions

Post by rkhusky » Fri Jan 11, 2019 2:31 pm

Bully3000 wrote:
Fri Jan 11, 2019 1:52 pm
The more I read about the backdoor Roth the less I am inclined to want to pursue it currently, Looks like will just up my taxable income if i am reading correctly? and non deductible contribution versus taxable and TLH look to be about a wash over 30 years.

Maybe just contribute to a taxable and designate for retirement but can also serve as a last layer of protection should i need to withdraw the money earlier than my planned retirement.
See the second table on this page for a specific comparison of taxable, Traditional IRA, Roth IRA and non-deductible IRA: https://www.bogleheads.org/wiki/Non-ded ... tional_IRA

Roth IRA is always better than taxable and non-deductible IRA.

Taxable is most often better than non-deductible IRA, including in this example.

Note that contributing to taxable, Roth or non-deductible IRA is the all the same in terms of this year's taxes. Only the deductible IRA lowers this year's taxes.

The only reason not to do backdoor Roth is if you can make a direct Roth contribution or you have a large Traditional IRA that you don't want to partially convert to Roth at the present time.

Topic Author
Bully3000
Posts: 17
Joined: Mon Jan 07, 2019 4:23 pm

Re: Non deductable IRA Contributions

Post by Bully3000 » Fri Jan 11, 2019 2:46 pm

rkhusky wrote:
Fri Jan 11, 2019 2:31 pm
Bully3000 wrote:
Fri Jan 11, 2019 1:52 pm
The more I read about the backdoor Roth the less I am inclined to want to pursue it currently, Looks like will just up my taxable income if i am reading correctly? and non deductible contribution versus taxable and TLH look to be about a wash over 30 years.

Maybe just contribute to a taxable and designate for retirement but can also serve as a last layer of protection should i need to withdraw the money earlier than my planned retirement.
See the second table on this page for a specific comparison of taxable, Traditional IRA, Roth IRA and non-deductible IRA: https://www.bogleheads.org/wiki/Non-ded ... tional_IRA

Roth IRA is always better than taxable and non-deductible IRA.

Taxable is most often better than non-deductible IRA, including in this example.

Note that contributing to taxable, Roth or non-deductible IRA is the all the same in terms of this year's taxes. Only the deductible IRA lowers this year's taxes.

The only reason not to do backdoor Roth is if you can make a direct Roth contribution or you have a large Traditional IRA that you don't want to partially convert to Roth at the present time.
OK so if i make a non deductible contribution to a traditional IRA i am then allowed to open a Roth IRA and transfer that money into my Roth? And since I never received a tax deduction there will be no penalty for doing this? so I could for example transfer monthly into my IRA and then immediately transfer to my Roth or best to make a yearly lump sum to traditional and then convert the account or transfer the funds?

Sorry but this is a subject I am really struggling to understand all the implications.

NotWhoYouThink
Posts: 2120
Joined: Fri Dec 26, 2014 4:19 pm

Re: Non deductable IRA Contributions

Post by NotWhoYouThink » Fri Jan 11, 2019 3:10 pm

You haven't quite answered the question about whether you already have an IRA which you previously made deductible contributions to, or maybe rolled over from a 401k plan.

If you have no IRA now, then back door Roth is a good plan. If you do have an IRA than things get more complicated.

JBTX
Posts: 4444
Joined: Wed Jul 26, 2017 12:46 pm

Re: Non deductable IRA Contributions

Post by JBTX » Fri Jan 11, 2019 3:19 pm

Bully3000 wrote:
Fri Jan 11, 2019 2:46 pm
rkhusky wrote:
Fri Jan 11, 2019 2:31 pm
Bully3000 wrote:
Fri Jan 11, 2019 1:52 pm
The more I read about the backdoor Roth the less I am inclined to want to pursue it currently, Looks like will just up my taxable income if i am reading correctly? and non deductible contribution versus taxable and TLH look to be about a wash over 30 years.

Maybe just contribute to a taxable and designate for retirement but can also serve as a last layer of protection should i need to withdraw the money earlier than my planned retirement.
See the second table on this page for a specific comparison of taxable, Traditional IRA, Roth IRA and non-deductible IRA: https://www.bogleheads.org/wiki/Non-ded ... tional_IRA

Roth IRA is always better than taxable and non-deductible IRA.

Taxable is most often better than non-deductible IRA, including in this example.

Note that contributing to taxable, Roth or non-deductible IRA is the all the same in terms of this year's taxes. Only the deductible IRA lowers this year's taxes.

The only reason not to do backdoor Roth is if you can make a direct Roth contribution or you have a large Traditional IRA that you don't want to partially convert to Roth at the present time.
OK so if i make a non deductible contribution to a traditional IRA i am then allowed to open a Roth IRA and transfer that money into my Roth?
Yes, it is called a Roth conversion
And since I never received a tax deduction there will be no penalty for doing this?
No penalty. You can always roll a traditional IRA, whether deductible or non deductible, into a Roth. You will just have to pay taxes on any of the amounts that have not been taxed yet. In the case of a Non Deductible to Roth IRA, if you do it right away, there will be no (or very little) taxable income.
so I could for example transfer monthly into my IRA and then immediately transfer to my Roth or best to make a yearly lump sum to traditional and then convert the account or transfer the funds?
Yes, you could do that. Note if you do contribute to a non deductible you will have to fill out an IRS form 8606. Some say it is easy, others seem to frequently screw it up. It is easy to forget. I'm not sure if doing it monthly adds any real material complication or not.
Sorry but this is a subject I am really struggling to understand all the implications.
One other thing to watch out for - if you already have other traditional deductible IRAs (not 401ks) then doing a backdoor Roth isn't a great idea, because the IRS makes you prorate some income from your deductible traditional IRAs upon Roth conversion even though you didn't convert the deductible traditional IRA.

One other side note: A non deductible could be useful if you were going to use it as a place to park income generating investments with little or no capital gains, like bonds, if they would have otherwise been in a taxable account.

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celia
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Location: SoCal

Re: Non deductable IRA Contributions

Post by celia » Fri Jan 11, 2019 3:33 pm

Bully3000 wrote:
Fri Jan 11, 2019 9:55 am
livesoft wrote:
Fri Jan 11, 2019 9:52 am
Non-deductible contributions work as explained in IRS Publicatoin 590A.

You will need to file a Form 8606 with your tax return. Instructions and form are online. Tax prep software is pretty good at dealing with all this.

You need to understand what a Backdoor Roth IRA is ... even if you decide not to perform the transactions for one. See the wiki:
https://www.bogleheads.org/wiki/Backdoor_Roth

All this is really easy unless you start reading posts about it on bogleheads.org. Somehow posters make it more complicated than it is and confuse people.
The more I read the stupider i get.
You are not stupid, but just refuse to read this really great wiki page. :beer It now has examples and how to report the contribution and conversion on your tax return. I can tell you didn't read it because your response to livesoft is stamped 3 minutes later than his post and depending on how familiar you already are with the individual concepts, it should take at least 15 minutes to read.

This is not to say the Backdoor Roth is suited for you as we don't know enough about your situation, but if you want us to help you, you need to be willing to do your part.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

Topic Author
Bully3000
Posts: 17
Joined: Mon Jan 07, 2019 4:23 pm

Re: Non deductable IRA Contributions

Post by Bully3000 » Fri Jan 11, 2019 3:52 pm

NotWhoYouThink wrote:
Fri Jan 11, 2019 3:10 pm
You haven't quite answered the question about whether you already have an IRA which you previously made deductible contributions to, or maybe rolled over from a 401k plan.

If you have no IRA now, then back door Roth is a good plan. If you do have an IRA than things get more complicated.
I have an IRA but all contributions have been non deductible at this point .

rkhusky
Posts: 6059
Joined: Thu Aug 18, 2011 8:09 pm

Re: Non deductable IRA Contributions

Post by rkhusky » Fri Jan 11, 2019 4:02 pm

Bully3000 wrote:
Fri Jan 11, 2019 3:52 pm
I have an IRA but all contributions have been non deductible at this point .
And no other Traditional IRA's (non-Roth)? The IRS considers all your Traditional IRA's as one big IRA.

If this is the only Traditional IRA that you have, then if you convert the whole thing to Roth, the only taxes that you would pay would be on the earnings. Given the recent drop in the market, your earnings could be low to zero.

Topic Author
Bully3000
Posts: 17
Joined: Mon Jan 07, 2019 4:23 pm

Re: Non deductable IRA Contributions

Post by Bully3000 » Fri Jan 11, 2019 5:55 pm

celia wrote:
Fri Jan 11, 2019 3:33 pm
Bully3000 wrote:
Fri Jan 11, 2019 9:55 am
livesoft wrote:
Fri Jan 11, 2019 9:52 am
Non-deductible contributions work as explained in IRS Publicatoin 590A.

You will need to file a Form 8606 with your tax return. Instructions and form are online. Tax prep software is pretty good at dealing with all this.

You need to understand what a Backdoor Roth IRA is ... even if you decide not to perform the transactions for one. See the wiki:
https://www.bogleheads.org/wiki/Backdoor_Roth

All this is really easy unless you start reading posts about it on bogleheads.org. Somehow posters make it more complicated than it is and confuse people.
The more I read the stupider i get.
You are not stupid, but just refuse to read this really great wiki page. :beer It now has examples and how to report the contribution and conversion on your tax return. I can tell you didn't read it because your response to livesoft is stamped 3 minutes later than his post and depending on how familiar you already are with the individual concepts, it should take at least 15 minutes to read.

This is not to say the Backdoor Roth is suited for you as we don't know enough about your situation, but if you want us to help you, you need to be willing to do your part.
I will make a point to read links more in future :happy

rkhusky
Posts: 6059
Joined: Thu Aug 18, 2011 8:09 pm

Re: Non deductable IRA Contributions

Post by rkhusky » Fri Jan 11, 2019 9:06 pm

The backdoor Roth is simply 1) contribute to a Traditional IRA and don’t deduct the contribution on your taxes and 2) convert the contribution to a Roth IRA after a day or two.

If you put the contribution in a MM there should be little taxable earnings.

If you transfer the contribution from a taxable account at the IRA provider, you can avoid the delays of a bank transfer.

If you have existing tIRA’s with taxable contributions and/or earnings, your tax will be higher due to the pro-rata rule.

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