Non-Deductible IRA

Non-Deductible IRA

By: Martin M. Shenkman, CPA, MBA, JD

Similar to the Traditional IRA, the Non-Deductible IRA allows a working individual under the age of 70 ½ to contribute up to $4,000 of compensation each year. Unlike the Traditional IRA though, the Non-Deductible IRA contribution is made with after-tax dollars. The income tax deduction allowed for the Traditional IRA is not available to the Non-Deductible IRA. For the most part, the Non-Deductible IRA is utilized by those who do not qualify for the Traditional IRA, but who can benefit from the tax deferral of earnings allowed with the Non-Deductible IRA.

General financial literature advises not to contribute to a non-deductible IRA as it does not make financial sense. This is a one-dimensional planning perspective and not always correct. IRA assets are protected up to $1 million in bankruptcy. IRAs are simple, no cost ways to invest in a format that has tremendous creditor protection. Use them. Why not? Rollovers of pension plans into your IRA are protected without limitations, so don't combine them (even if the same financial press says to simplify by consolidating them). Use newly released IRS Form 8606 to report non-deductible IRAs to the IRS with your annual tax return.

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