According to a 2024 Investment Company Institute report, over 40% of American households own an IRA – yet only 15% contributed to one in the most recent year.
Yes, you should contribute to a non-deductible IRA if you’ve already maxed out other retirement accounts, because it still offers tax-deferred growth and even a pathway to a Roth IRA (through a backdoor Roth conversion). However, this strategy comes with important caveats and isn’t the best move for everyone. In this comprehensive guide, we’ll break down exactly when a non-deductible IRA makes sense, how to avoid costly tax pitfalls, and what alternatives to consider.
What You’ll Learn:
- 🎯 Direct Answer Up Front: A clear yes-or-no verdict on funding a non-deductible IRA – and why.
- 💡 Pitfalls to Avoid: Common tax traps (like double taxation and the pro-rata rule) and how to sidestep them.
- 🔎 Real-Life Examples: How different earners (high income, early savers, self-employed) can make the most of – or skip – non-deductible IRA contributions.
- 🔀 Comparisons & Alternatives: How a non-deductible IRA stacks up against a Roth IRA, 401(k), HSA, or taxable brokerage account.
- 📚 Key Terms & FAQs: Quick definitions (MAGI, Form 8606, RMDs, etc.), state-by-state nuances, and expert insights to inform your decision.
Let’s dive in and demystify the non-deductible IRA so you can decide confidently if this strategy fits your financial game plan.
Yes – But Only If You Meet These Conditions (Direct Answer)
So, should you contribute to a non-deductible IRA? In most cases, yes – but only under the right conditions. A non-deductible Traditional IRA can be a smart move if:
- You earn too much to qualify for deductible IRA contributions or direct Roth IRA contributions. High earners often hit income limits that block the usual retirement routes. A non-deductible IRA offers a loophole to still put money in a tax-advantaged account.
- You’ve already maxed out other tax-favored retirement plans (like your 401(k) and, if eligible, a Roth IRA). After using those options, a non-deductible IRA is one of the few remaining ways to stash extra retirement dollars with some tax benefits.
- You plan to execute a backdoor Roth IRA strategy – contributing after-tax to a Traditional IRA and then converting it to a Roth IRA. This conversion turns your non-deductible contribution into tax-free Roth growth (more on this later). In this scenario, a non-deductible IRA is basically a stepping stone to get into a Roth.
- You want tax-deferred growth on investments that would otherwise be in a taxable brokerage account. Inside an IRA, your dividends, interest, and gains can compound without yearly taxes, which can be beneficial if you expect to hold the investments long-term.
However, do NOT contribute to a non-deductible IRA if these conditions aren’t met. For many people, the honest answer is “no, it’s not worth it” – especially if you have better options available. For instance: if you’re eligible for a deductible Traditional IRA or a Roth IRA, those should almost always come first. And if you’re nowhere near maxing your 401(k) or HSA, those accounts offer immediate tax benefits that a non-deductible IRA doesn’t. In short, a non-deductible IRA is usually a backup plan – a useful one for certain high earners and super-savers, but not the first-choice vehicle for most people. Next, we’ll explore exactly why it’s considered a backup and the pitfalls to avoid when using this strategy.
Beware the Tax Traps: Mistakes to Avoid with Non-Deductible IRAs
Contributing to a non-deductible IRA is easy – but doing it right is a bit more complicated. Here are the major pitfalls and costly mistakes to steer clear of:
❌ Forgetting About Form 8606. The IRS doesn’t give you a deduction for your contribution, but you still need to inform them you made an after-tax contribution. That’s done via IRS Form 8606, which tracks your IRA basis (the total of your non-deductible contributions). Failing to file Form 8606 each year you contribute after-tax money is a recipe for double taxation. Why? Because if the IRS doesn’t know you already paid tax on that contribution, they’ll happily tax it again when you withdraw it in retirement! Always file Form 8606 to document your after-tax basis. Keep copies forever – you (or your accountant or even your heirs) will need those records many years down the line.
❌ Mixing Pre-Tax and After-Tax Funds Without a Plan. If you have other Traditional IRAs with pre-tax money (like rollover IRAs or prior deductible contributions), adding non-deductible contributions to the mix can complicate things. The IRS requires pro-rata taxation on withdrawals or Roth conversions. This means you cannot simply pull out or convert “just the after-tax dollars” – every distribution or conversion will contain a proportional mix of taxable and non-taxable funds. For example, say you have $45,000 of pre-tax IRA money and add $5,000 after-tax.
At withdrawal, 10% of any amount you take out will be considered after-tax (tax-free) and 90% will be taxable. This pro-rata rule can diminish the benefit of a backdoor Roth conversion if you have large pre-tax IRA balances (since a chunk of your conversion will be taxable). What to avoid: If your goal is a clean backdoor Roth, avoid commingling after-tax contributions with big pre-tax IRA balances. One workaround is rolling your pre-tax IRA money into a 401(k) or other employer plan, if available – that can isolate your after-tax IRA funds for conversion.
❌ Not Planning for RMDs. Unlike a Roth IRA, a Traditional IRA (including one funded with non-deductible contributions) is subject to Required Minimum Distributions (RMDs) in retirement. Starting at age 73 (for those turning 73 after 2022), you must withdraw a certain amount each year, whether you need the money or not. Non-deductible contributions reduce the taxable portion of each RMD (since part of your distribution is just returning your own after-tax money), but they don’t reduce the total RMD amount.
In fact, by contributing more to a Traditional IRA, you may end up with a larger account balance in retirement – leading to higher mandatory withdrawals. If you don’t plan to convert to Roth, be aware that RMDs will force out your savings later and the earnings will be taxed. For wealthy retirees who don’t need the cash, bigger RMDs can push you into higher tax brackets or even increase Medicare premiums.
❌ Assuming “Tax-Deferred” Means “Tax-Free.” It’s crucial to remember: a non-deductible IRA does not give you tax-free withdrawals – only Roth IRAs do that. The growth in your account will be taxed as ordinary income when you withdraw it down the road. Some investors mistakenly treat a nondeductible IRA like it’s “just as good as a Roth later.” It’s not.
Unless you convert it to a Roth, you’re merely postponing taxes on the earnings, not escaping them. And ordinary income tax in retirement could be as high or higher than capital gains tax rates. This leads some experts to note that if you leave a non-deductible IRA unconverted, you might end up paying more tax on your investment growth than if you had just invested in a taxable account (where long-term gains and qualified dividends get lower tax rates). The key lesson: tax-deferred isn’t the same as tax-free – plan accordingly.
❌ Ignoring Better Options. A non-deductible IRA should usually come after exhausting other opportunities. Make sure you’re maxing your 401(k) (especially if you have an employer match – that’s free money), contributing to an HSA if you’re eligible (HSAs have triple tax benefits), and putting money into a Roth IRA if you can (either directly or via backdoor). If you have self-employment income, consider a SEP IRA or Solo 401(k) which have much higher contribution limits.
Only once those avenues are tapped out does the non-deductible Traditional IRA become attractive. Don’t let the idea of “I have an IRA!” lure you into neglecting a 401(k) that could be deductible, or an HSA that beats even a Roth in tax perks. In short, avoid using a non-deductible IRA as a first resort. It’s generally a fallback for extra savings once superior options are off the table.
By sidestepping these mistakes – filing your forms, managing your pre-tax funds, planning for RMDs, and prioritizing better accounts – you can use a non-deductible IRA wisely without falling into a tax trap. Next, let’s look at some real-life scenarios to illustrate when this strategy shines and when it fizzles.
Real-Life Scenarios: When a Non-Deductible IRA Shines (and When It Flops)
It’s easier to decide on the non-deductible IRA question when you see it in action. Let’s explore a few scenarios across different investor profiles to show who benefits most and who might want to pass on this strategy:
🧑💼 High-Income Professional (Maxed 401k, Above Roth Limit). Meet Alex, a 45-year-old earning a high salary. Alex contributes the maximum to a 401(k) at work, getting the full employer match. However, Alex’s income is too high for direct Roth IRA contributions and also too high to deduct a Traditional IRA contribution (because of active participation in the 401k). Should Alex contribute to a non-deductible IRA? Yes – with a twist. Alex decides to contribute the annual IRA limit (say $6,500) as a non-deductible contribution. Shortly after, Alex performs a backdoor Roth conversion – moving that $6,500 from the Traditional IRA to a Roth IRA.
Because the contribution was after-tax and converted quickly, there’s minimal tax owed on the conversion (just tax on any tiny earnings in between). Now Alex effectively has an extra $6,500 in a Roth IRA growing tax-free. This strategy shines for Alex because it bypasses the income restrictions legally. Key point: High earners like Alex can leverage the non-deductible IRA as a gateway to Roth. Without conversion, Alex would face eventual taxes on growth, but with the backdoor Roth, all future growth is shielded.
👩🎓 Early-Career Saver (Moderate Income, Has Workplace Plan). Meet Bella, age 30, who is building her career. She has a 401(k) at work but can only afford to contribute, say, 5% of her salary there. Her income is moderate ($70k) – low enough that she could deduct a Traditional IRA contribution or contribute to a Roth IRA directly. Should Bella use a non-deductible IRA? No. Bella has better choices: She could contribute to a Roth IRA and enjoy tax-free growth, or she could contribute to a Traditional IRA and potentially get a tax deduction now (since her income might be within the deductible range if she’s not maxing the 401k). A non-deductible contribution offers Bella no immediate tax benefit and more hassle.
Bella chooses to put $6,500 into a Roth IRA for the year, since she’s in a lower tax bracket and values tax-free retirement money. Key point: For those who can do Roth or deductible IRA, a non-deductible IRA doesn’t make much sense. It’s like choosing the one door with no prize behind it when two other doors have prizes.
🧑🔧 Self-Employed Entrepreneur (No Employer Plan, High Income). Meet Carlos, a self-employed consultant. Carlos has no employer plan (he is the employer) and earns a high income. The good news: even with high income, because he’s not covered by a workplace retirement plan, he can fully deduct a Traditional IRA contribution if he wants. But Carlos actually has an even better option: he sets up a Solo 401(k) for his business, allowing him to defer much more than an IRA limit. Between employer and employee contributions, Carlos can sock away over $60k pre-tax if business is good. In Carlos’s case, a non-deductible IRA is irrelevant – he can do deductible contributions, or better yet, use a bigger self-employed plan.
Carlos only considers a non-deductible IRA if one day he maxes his Solo 401(k) and still has spare cash to save, and perhaps earns so much that even a Roth IRA backdoor strategy becomes relevant. Key point: If you’re self-employed, check the rules – you might not be subject to the IRA deduction income limits at all (if you have no employer plan), making non-deductible contributions unnecessary. Or you might have superior self-employed plans. Use those first.
🏡 Mid-Career Dual-Income Couple (One Spouse Covered, One Not). Meet Dana and Evan, a married couple in their 40s. Dana has a corporate job with a 401(k), Evan works for a small company with no retirement plan. Their combined income is on the high side – too high for Roth IRAs outright. Dana’s 401(k) is maxed. They wonder about IRAs: Dana, being covered by a plan and high income, cannot deduct a Traditional IRA. Evan, not covered by any plan, could deduct a Traditional IRA despite the high combined income (the IRS allows a higher limit for the spouse without a plan – in 2025 it’s over $200k MAGI).
However, because they plan to retire in a higher tax state and like Roths, they decide: Evan will make a deductible IRA contribution (since he can) to lower their taxable income, while Dana contributes to a non-deductible IRA and promptly converts it to a Roth (backdoor strategy). This way, they optimize both: one gets a deduction, the other funnels money into a Roth. If Dana didn’t convert to Roth, her non-deductible IRA would just sit growing tax-deferred. They choose conversion to maximize long-term tax-free growth. Key point: In married households with mixed plan coverage, coordinate strategy. Use deductible contributions where allowed, and consider non-deductible + Roth conversion for the high earner who can’t deduct.
💰 Ultra-High Net Worth (Maxing Everything, Extra Cash to Invest). Meet Simone, a 55-year-old executive who maxes her 401(k), does the maximum HSA contribution, and even uses a mega backdoor Roth in her company’s 401(k) plan (after-tax 401k contributions rolled to Roth 401k). She still has surplus savings to invest each year. Simone’s IRA options: she can’t deduct a Traditional IRA (income too high, plus covered by plan) and can’t do direct Roth. She could do a non-deductible IRA. Does it shine? Mildly, yes, if she also converts it to Roth. Simone’s case shows one of the only times you’d use a non-deductible IRA without immediate conversion: if for some reason Simone didn’t want to convert to Roth right away (perhaps she has large pre-tax IRAs and wants to delay conversion until after rolling them into a new employer plan or waiting for retirement to reduce the pro-rata tax hit).
She might contribute non-deductible now, let it sit, and convert a few years later when circumstances are better. But leaving it indefinitely is not ideal – by age 73 she’ll face RMDs. For someone like Simone, it’s really Roth or nothing. And indeed, Simone annually contributes to a Traditional IRA after-tax and, to keep things clean, converts it within the same week to her Roth IRA. All future growth occurs in Roth. Key point: For ultra-savers who have maxed everything else, a non-deductible IRA is one more bucket to fill – but it almost always should be a temporary parking spot before a Roth conversion.
These examples illustrate a common theme: the non-deductible IRA is often a means to an end, not an end itself. It shines brightest as part of the backdoor Roth maneuver for high earners. It flops if used as a long-term stand-alone account without conversion, unless you have no other way to get tax deferral on those dollars. In borderline cases (moderate earners), it tends to lose out to simpler choices like Roth or deductible IRAs.
Common Scenarios & Best Moves:
Below is a quick-reference table summarizing what different investors should consider:
| Scenario | Recommended Approach |
|---|---|
| High earner with 401(k), above Roth income limit | Contribute non-deductible and convert to Roth IRA (Backdoor). |
| High earner with large pre-tax IRA balances | Avoid new after-tax IRA money unless you can isolate or convert (to prevent big pro-rata taxes). Consider rolling pre-tax IRA into 401(k) first. |
| Moderate income, covered by work plan (mid-career) | If eligible, do deductible Traditional or Roth IRA instead. A non-deductible IRA is a last resort here. |
| Moderate income, no work plan | Deductible Traditional IRA likely best (no income limit to deduct if no plan). Roth IRA also an option if desired. No need for non-deductible. |
| Self-employed, high income, has solo 401(k) etc. | Max those self-employed plans first. Only use non-deductible IRA if all other contribution limits are reached (and then likely convert it). |
| Already retired or near 73 with IRA basis | If you have old non-deductible IRA basis, consider Roth converting before RMDs start (to avoid mixed taxable RMDs), or plan withdrawals to use up basis efficiently. |
Each personal situation is unique, but the table above captures the consensus strategies. Next, we’ll pit the non-deductible IRA against other savings options to further clarify its value.
Battle of the Accounts: Non-Deductible IRA vs Roth, 401(k), HSA, and Brokerage
How does contributing to a non-deductible IRA measure up to other investment accounts? Let’s compare key features to see which option wins in different aspects:
🆚 Non-Deductible Traditional IRA vs. Roth IRA: This is the crux of many decisions. A Roth IRA is funded with after-tax money just like a non-deductible IRA, but the difference is huge at withdrawal: Roth withdrawals (if qualified) are completely tax-free, whereas Traditional IRA withdrawals (even from non-deductible contributions) are partly or fully taxable. Roths also have no RMDs for the original owner, so you can let it grow as long as you want. The Roth clearly wins on tax treatment of growth and flexibility.
The only advantage a non-deductible Traditional might have is no income limit to contribute – if you’re over the Roth income cap, you can’t contribute directly to Roth, whereas you can always contribute to a Traditional IRA (deductible or not). But savvy investors will see that as a temporary obstacle: they’d contribute non-deductible and then convert to Roth, effectively getting into a Roth anyway. Verdict: Roth IRA is superior for those who qualify. Non-deductible Traditional IRA is essentially a Roth workaround for those who don’t qualify outright. If you can go Roth (either directly or via conversion), do it. If not, the non-deductible still gives you the opportunity, albeit with extra steps.
🆚 Traditional IRA (Deductible) vs. Non-Deductible IRA: What if you qualify for a deductible Traditional IRA? Getting the tax deduction now is a big perk – it lowers your taxable income today, giving you an immediate benefit. A deductible contribution plus tax-deferred growth is powerful, especially if you expect to be in a lower tax bracket in retirement. A non-deductible contribution forgoes that upfront benefit. Essentially, a deductible IRA is like a pre-tax 401k: pay taxes later; a non-deductible IRA is taxed now and later (now on contribution, later on gains). The only thing non-deductible has going for it here is availability (again, if your income or plan status denies you the deduction, at least you can still contribute something). Verdict: Prefer deductible contributions if you’re eligible – they beat non-deductible in nearly every case unless you strongly anticipate a zero-tax retirement (very uncommon). Non-deductible is the fallback if you can’t deduct.
🆚 Non-Deductible IRA vs. 401(k) or 403(b): If your employer plan has room (you haven’t hit the annual limit), it’s usually better to contribute more there rather than to a non-deductible IRA. Traditional 401(k) contributions are pre-tax (deductible) and often come with employer matching. Roth 401(k) contributions (if available) give you Roth benefits without income limits. Plus, 401(k) limits are much higher (in 2025, $22,500 + catch-ups, etc.) compared to IRA’s $6,500–7,500. The one scenario a non-deductible IRA might edge out: if your 401(k) plan options are terrible (high fees, poor funds) and you’ve already gotten the full match, you might invest after-tax in an IRA for better investment choices – but in that case, you’d typically do a Roth IRA if allowed, not a non-deductible Traditional.
If Roth isn’t allowed (high income) and you refuse to use the 401(k) beyond match, then non-deductible IRA gives you tax deferral at least. Also, some 401(k) plans don’t allow after-tax contributions for a mega backdoor Roth – if they do, that route is even more powerful (you can contribute tens of thousands after-tax to the 401k and immediately roll to Roth within the plan or out to an IRA, with no pro-rata concerns). If your plan has that, it beats a regular non-deductible IRA by a mile because of the higher limits. Verdict: 401(k)/403(b) contributions (pre-tax or Roth) come first. Non-deductible IRA is a distant backup unless you’re just completely out of room in the employer plan or need a Roth workaround.
🆚 Non-Deductible IRA vs. HSA: An HSA (Health Savings Account), while meant for healthcare, is often touted as a “stealth IRA” because of its triple tax benefit: contributions are deductible, growth is tax-free, and withdrawals are tax-free if used for medical expenses (and even if not, they function like a Traditional IRA after age 65). If you have access to an HSA (via a high-deductible health plan), contributing the max to it is generally more advantageous than a non-deductible IRA. You get an immediate tax break and potential tax-free withdrawals. HSA funds can also be invested and grow tax-deferred similarly. Verdict: HSA (if available) beats non-deductible IRA for tax efficiency. Fund your HSA fully before considering non-deductible IRA contributions.
🆚 Non-Deductible IRA vs. Taxable Brokerage Account: This comparison is interesting. A taxable brokerage account has no contribution limits, complete flexibility (withdraw anytime, no penalties), and you pay taxes along the way on dividends, interest, and realized gains. However, long-term capital gains and qualified dividends are taxed at preferential rates (0%, 15%, or 20% typically, plus possibly a 3.8% net investment tax for high earners). In contrast, the non-deductible IRA defers all taxes until withdrawal – no annual taxes on turnover, interest, etc. That sounds great, but when you do withdraw, any gains come out as ordinary income (which could be taxed at a higher rate than long-term capital gains would have been). So which is better? It depends on your investing style and future tax bracket. If you plan to buy and hold tax-efficient index funds in a brokerage for decades, the ongoing tax drag might be minimal (low turnover, mostly qualified dividends). You’ll then pay 15-20% on the gains when you sell. In a Traditional IRA, you pay 0% along the way, but maybe 25%+ at the end on withdrawals.
Math can swing either way. Generally, the longer the time horizon and the higher your expected retirement tax bracket, the less attractive the non-deductible IRA is compared to brokerage. But if you actively trade or have high-yield investments, the IRA’s deferral could save you significant yearly taxes. Another factor: state taxes – in a taxable account you’ll pay state tax on earnings annually; with an IRA, you might retire in a state with no income tax, potentially avoiding state tax on withdrawals.
Also, inheritance: taxable assets get a step-up in basis at death (heirs might not owe tax on gains), whereas an inherited Traditional IRA carries income tax for the beneficiary. Verdict: If you are disciplined to invest tax-efficiently and might face lower capital gains tax rates, a brokerage account can sometimes rival or beat a non-deductible IRA for long-term wealth building. But if you need the tax deferral to stick to your plan or have investments generating a lot of taxable income each year, the IRA can help shield those until retirement. Many high earners do both: fill tax-advantaged space (even non-deductible IRAs for backdoor Roths) and invest additional money in brokerage accounts for flexibility.
To boil it down, here’s a quick comparison of key features:
| Account Type | Tax Benefit Now | Tax Benefit Later | Contribution Limit |
|---|---|---|---|
| Traditional IRA (Deductible) | Immediate tax deduction (lowers taxable income today) | Tax-deferred growth; withdrawals taxed as ordinary income | $6,500/year (under 50) – combined IRA limit |
| Roth IRA | No deduction now (after-tax contributions) | Tax-free growth and withdrawals; no RMDs | $6,500/year (under 50), income limits apply |
| Traditional IRA (Non-deductible) | No deduction now (already taxed money) | Tax-deferred growth; withdrawals partly tax-free (basis) and partly taxable earnings; RMDs apply | $6,500/year (under 50) – combined IRA limit |
| 401(k) / 403(b) | Contributions can be pre-tax (deductible) or Roth; high contribution limits | Tax-deferred growth; employer plans often have RMDs (Roth 401k can be rolled to Roth IRA to avoid RMD) | $22,500/year (+$7,500 catch-up if 50+) in 2023–2024; higher with employer contributions |
| HSA | Contributions deductible (pretax) | Tax-free growth and tax-free withdrawals for medical expenses (like a super Roth for health costs) | $3,850 individual / $7,750 family (2023, slightly more in 2024); +$1k 55+ catch-up |
| Taxable Brokerage | No upfront tax break (invest with after-tax dollars) | No tax on principal withdrawal (you’ve paid as you earned it); gains taxed at capital gains rates; no forced distributions | No limits – invest as much as you want, whenever you want |
In this landscape, a non-deductible IRA is somewhat the odd one out – no break now, and only a partial break later. That’s why it’s often dubbed a “last resort IRA” or “poor man’s Roth”. It fills a gap (for those who can’t do better) but is rarely the star of the show. Use it to complement your overall strategy, not as the foundation.
Proof & Perspective: What the Experts and Data Say (Evidence)
Don’t just take our word for it – financial experts and studies have weighed in on the merits and drawbacks of non-deductible IRAs:
- Retirement Savers Underutilize IRAs: Data from the Investment Company Institute shows that while 43% of U.S. households have IRAs, only 15% contribute annually. One reason is confusion over IRA rules and limits. Many people skip IRA contributions if they don’t get a deduction, not realizing the potential long-term benefit. This suggests a lot of eligible savers leave money on the table by not using even a non-deductible IRA when they could. It’s a reminder that, under the right circumstances, contributing (even without a deduction) can beat not contributing at all.
- Christine Benz (Morningstar Director of Personal Finance) warns about the “two big drawbacks” of non-deductible Traditional IRAs: required minimum distributions and ordinary income tax on withdrawals. She notes that high-income investors who are forced into a nondeductible contribution end up with an account that will one day spit out taxable RMDs and be taxed at full income rates – a far cry from the tax-free withdrawals of a Roth. Her advice: don’t leave money in a nondeductible IRA for the long haul. Convert it to Roth if possible, or if not, be strategic about drawing it down.
- Darrow Wealth Management published an analysis bluntly titled “Why Non-Deductible IRA Contributions Aren’t Worth It,” highlighting that unless you convert to Roth, you could be looking at paying ordinary tax rates on earnings that might otherwise qualify for lower capital gains rates. They also stress the headache of recordkeeping and the real risk of paying tax twice if you mess up tracking the basis. Their stance: a non-deductible IRA is usually more trouble than it’s worth except as a vehicle for a backdoor Roth maneuver. This aligns with the consensus: it’s a niche tool, not a mainstream must-do.
- IRS and Congress Acknowledgment: Interestingly, Congress has never imposed an income limit on making Traditional IRA contributions. Anyone with earnings can contribute (until recently, age was the only limit, now removed). This implies even lawmakers envisioned the non-deductible IRA as a default option for high earners. And since 2010, IRS rules allow Roth conversions with no income cap, enabling the backdoor Roth strategy. The IRS has implicitly blessed this tactic (they’ve never moved to shut it down, and recent tax proposals to eliminate it have not passed). The existence of these rules is evidence that using a non-deductible IRA to eventually get to a Roth is not some sneaky trick – it’s a legitimate, if somewhat convoluted, strategy for high-income taxpayers.
- Surveys of Investor Behavior: Some informal polls (even on personal finance forums) find that a majority of savvy high-income investors do contribute to non-deductible IRAs specifically to do backdoor Roth conversions. It’s become a routine yearly move for many financially literate households. On the other hand, very few advise contributing after-tax to an IRA without a conversion plan. The consensus from the “crowd wisdom” is clear: do it only as part of the Roth conversion strategy or if you absolutely need the tax deferral and have no better option.
- State Tax Nuances: Experts also point out that state tax considerations can tilt the math. If you live (or will retire) in a state with no income tax (e.g., Florida, Texas), then choosing a taxable account vs. an IRA might lean more toward the IRA since you’re not worried about state tax on the eventual withdrawal (and you avoid state tax on yearly taxable distributions in the meantime). Conversely, if you live in a high-tax state now but plan to retire in a low-tax state, deferring income via a Traditional IRA (even non-deductible) can arbitrage the state taxes – pay later in a friendlier jurisdiction. These nuances are evidence that the non-deductible IRA decision isn’t just federal-tax driven; personal circumstances, including where you live, matter too.
In summary, the evidence and expert opinions reinforce our earlier conclusions: a non-deductible IRA is a tool with specific use-cases. It’s applauded as part of the backdoor Roth pipeline, and panned as a standalone investment bucket due to the ordinary taxes and RMDs. By understanding both the numbers and the expert perspectives, you can make an informed choice aligned with what savvy investors and advisors recommend.
Definitions Decoded: Key Terms to Know
Before we wrap up, let’s demystify some jargon and concepts we’ve discussed:
- Traditional IRA (Deductible): A retirement account allowing pre-tax contributions for those under certain income limits (or with no employer plan). You get a tax deduction now, investments grow tax-deferred, and withdrawals in retirement are fully taxable.
- Non-Deductible IRA: This is not a separate account type, but rather a Traditional IRA funded with after-tax dollars because you didn’t (or couldn’t) take a tax deduction for the contribution. It still grows tax-deferred. When you withdraw, a portion of each withdrawal is tax-free return of your original contributions (the basis), and the rest is taxable earnings.
- Roth IRA: A retirement account funded with after-tax money (no deduction up front) that grows tax-free and offers tax-free withdrawals in retirement (if rules are met). Roth IRAs have income limits for contribution (e.g., high earners are phased out) but they have no RMDs during the original owner’s lifetime, and no taxes on qualified distributions. Roth = pay tax now, never again.
- Modified Adjusted Gross Income (MAGI): This is the income measure the IRS uses to determine eligibility for IRA deductions and Roth contributions. It’s basically your Adjusted Gross Income with certain deductions added back. There are different MAGI thresholds for different situations (e.g., in 2025, a married couple filing jointly can fully deduct a Traditional IRA if MAGI < ~$116k when covered by a plan, phase-out to ~$136k; for Roth contributions, phase-out starts around $218k MAGI). Knowing your MAGI is key to knowing if your IRA contribution will be deductible, Roth-eligible, or need to be non-deductible.
- Form 8606: An IRS form titled “Nondeductible IRAs”. You must file this for any year you contribute after-tax money to a Traditional IRA or any year you take a distribution from an IRA that has any after-tax basis. It tracks the cumulative basis. Essentially, it prevents double taxation by documenting what portion of your IRA assets have already been taxed. If you’ve been contributing non-deductibly for years, your Form 8606 will carry forward the running total of basis. Keep this form updated and keep copies forever.
- Backdoor Roth IRA: A two-step strategy that allows high-income individuals to get money into a Roth IRA despite earning over the Roth income limit. Step 1: contribute to a Traditional IRA (often non-deductible if you can’t deduct). Step 2: soon after, convert that IRA to a Roth IRA. Since 2010 there’s no income cap on conversions. If done correctly (and if you have little to no other pre-tax IRA money to complicate pro-rata), the only tax due on conversion is on any growth that occurred in between contribution and conversion (which can be minimized by converting quickly). The end result: you have funds in a Roth IRA that originated from what was essentially an after-tax contribution. It’s “backdoor” because you went around the direct contribution door that was closed to you.
- Pro-Rata Rule: An IRS rule that dictates how taxes are calculated on IRA distributions when an individual has a mix of pre-tax and after-tax funds in their IRAs. The rule says that any distribution (or Roth conversion) from any Traditional/SEP/SIMPLE IRA will be treated as a proportionate mix of taxable and non-taxable dollars relative to all your IRA balances. In other words, you cannot cherry-pick only the after-tax contributions to convert or withdraw tax-free; you have to include a percentage of taxable money too, based on the ratio of your basis to your total IRA balance. This is why having other pre-tax IRA money can make a backdoor Roth partially taxable. The pro-rata calculation resets each year based on year-end balances and remaining basis.
- Required Minimum Distribution (RMD): The minimum amount the IRS forces you to withdraw from retirement accounts each year, starting at a certain age. For Traditional IRAs (and non-deductible contributions within them), RMDs kick in at age 73 for those reaching that age after 2022 (thanks to the SECURE 2.0 Act). If you turned 72 before 2023, you were already subject to RMDs at 72. RMDs ensure the government eventually taxes the money. Even if part of your IRA is after-tax, the RMD calculation doesn’t exclude it – you calculate the RMD on the total account balance. However, when you actually pay taxes on the distribution, you’ll only pay tax on the portion that is attributable to pre-tax money. Roth IRAs have no RMDs for the original owner – a big advantage.
- Basis: In IRA context, “basis” refers to the portion of your IRA money that has already been taxed (i.e., your non-deductible contributions). If you put in $5,000 after tax, that $5,000 is your basis. Basis is important because it’s what you get back tax-free. All your IRAs share a single combined basis amount (Form 8606 keeps track). If you never made any non-deductible contributions, your basis is zero (meaning every penny out of the IRA is taxable). If you have basis, each withdrawal will have a tax-free portion proportional to the basis fraction.
- Active Participant (Retirement Plan Coverage): A term used to determine IRA deduction limits. If you (or your spouse) are an “active participant” in an employer-sponsored retirement plan (like a 401k, 403b, pension, etc.) at any point in a year, then the income limits for deductible IRA contributions apply to you. If you’re not an active participant and your spouse isn’t either, there’s no income limit for deducting a Traditional IRA – you could make a million dollars and still deduct that $6,500 IRA (though in that case you’d likely have a plan anyway!). If one spouse is covered and the other isn’t, the non-covered spouse gets a much higher income threshold (often allowing a deduction when joint income is in low $200ks). This matters because being an active participant is what often forces people into making non-deductible contributions when their income rises.
Understanding these terms will help you navigate not just this decision but many retirement planning choices. Now, let’s consider some specific entities – people, organizations, and laws – that play a role in the story of IRAs and retirement saving.
Who’s Who in the IRA World: Related People, Orgs, and Laws
Retirement accounts don’t exist in a vacuum – they’re shaped by laws and overseen by institutions. Here are some key players and regulations relevant to the topic:
- Internal Revenue Service (IRS): The U.S. tax authority that sets the rules for IRAs. The IRS defines contribution limits, deduction eligibility, and distribution regulations. They’re the ones who require you to file Form 8606 for non-deductible contributions and who enforce the pro-rata rule and RMDs. Essentially, the IRS is the referee making sure if you got a deduction or deferral, you eventually pay your taxes. They also provide the IRA deduction worksheets and publish Publication 590 which details IRA rules annually. If you ever have a question on “can I do this with my IRA?” – it’s ultimately the IRS code and regulations that have the final say.
- Congress and Legislation: U.S. Congress crafts the laws that govern retirement accounts. Over the years, several major laws have defined IRAs:
- The Employee Retirement Income Security Act (ERISA) of 1974 introduced IRAs originally, but back then you could only contribute if you weren’t covered by a workplace plan.
- The Tax Reform Act of 1986 began phasing in the concept of non-deductible contributions by introducing income limits for deductible IRAs (creating the scenario where higher earners could still contribute but not deduct).
- The creation of the Roth IRA came with the Taxpayer Relief Act of 1997, spearheaded by Senator William Roth – giving high earners a new dream (tax-free growth) but with income caps to contribute.
- The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 set the stage to eventually remove the conversion income limit (which happened in 2010), enabling backdoor Roth IRAs.
- The SECURE Act (2019) and SECURE Act 2.0 (2022) raised the RMD age from 70½ to 72 and now to 73 (and eventually 75 for younger folks), and removed the age 70½ limit on making IRA contributions. That means even a 75-year-old with earned income can make a contribution (deductible or not) – a nod to longer working careers.
- Congress has floated ideas to curtail backdoor Roths (for instance, the Build Back Better bill in 2021 proposed eliminating the ability of high earners to do Roth conversions of after-tax contributions starting in 2022). However, that provision did not become law. As of 2025, backdoor Roth IRAs remain legal. But it’s always wise to stay tuned to new legislation, as rules can change.
- Financial Industry & Brokerages: Companies like Vanguard, Fidelity, Schwab, and others where you actually open your IRAs. These institutions implement the rules in practice – for example, they provide the forms and interface to make contributions and conversions. Some will allow you to designate a contribution as non-deductible (though technically all Traditional IRA contributions are the same; it’s your tax filing that determines deductibility). Brokerages also send you end-of-year statements and tax forms (Form 5498 for contributions, 1099-R for distributions) that you’ll use to file taxes. They often have tools or warnings when you’re about to over-contribute or if you try to contribute to a Roth but your income might be too high (though they can’t know for sure). In short, these companies are facilitators, and many provide educational content. For instance, Fidelity might remind investors that “even if your contribution is non-deductible, it can still grow tax-deferred” – encouraging people to save regardless of deduction status.
- Financial Advisors and Personal Finance Personalities: Many individuals influence public understanding of these concepts. We mentioned Christine Benz, who often writes about IRA strategies. Another well-known expert is Ed Slott, often called “America’s IRA Expert,” who frequently discusses the importance of filing Form 8606 and strategies like the backdoor Roth in media and books. Suze Orman, Dave Ramsey, and other popular finance gurus also chime in: generally, they encourage Roth IRAs strongly and rarely highlight non-deductible Traditional IRAs except as a Roth conversion pathway. Bogleheads (the followers of Vanguard’s John Bogle) have a big online presence (forums) where they almost unanimously advise doing a backdoor Roth if ineligible for direct Roth, rather than contributing non-deductible and leaving it. This community perspective reinforces the notion that a non-deductible IRA is a temporary holding tank en route to Roth.
- State Tax Authorities: Each state has its own tax department and rules. As we discussed, a few states (like New Jersey, Pennsylvania, Massachusetts) do not align with the federal treatment of IRA contributions. For example, NJ doesn’t allow a deduction for Traditional IRA contributions on the state return – meaning all NJ IRA contributions are effectively “non-deductible” for state purposes. But correspondingly, NJ won’t tax you again on that money when withdrawn – only on the earnings. If you move states, things can get complex: you might have paid state tax on contributions in one state (building up a state-tax basis) and later live in another state when withdrawing. It’s on you (or your CPA) to keep track. States like Illinois and Mississippi fully exempt IRA (and 401k/Pension) withdrawals from taxation for retirees – effectively treating Traditional IRA money almost like a Roth at the state level. The table below highlights some of these differences:
| State (Tax Treatment) | IRA Contribution & Withdrawal Nuance |
|---|---|
| No State Income Tax (e.g. FL, TX, NV) | No state tax on contributions or withdrawals (state doesn’t tax income at all). A non-deductible IRA gives no state benefit now (since there’s no tax anyway) but also no cost later. |
| NJ, PA, MA (No state IRA deduction) | These states tax your Traditional IRA contributions upfront (no state deduction), but then exclude that amount from taxation at withdrawal. Essentially, they treat all IRA contributions as non-deductible, so you must track state basis too. Each withdrawal in these states can often be taken as “return of contributions first” (particularly in MA), meaning you might withdraw tax-free at the state level until you’ve taken out what you put in. It’s vital to maintain records so you don’t pay state tax twice. |
| States That Exempt Retirement Income | Some states with income tax give special breaks for IRA/401k withdrawals. Illinois and Mississippi, for example, exempt all qualified retirement distributions from state tax. Pennsylvania exempts retirement distributions after age 59½. For residents of these states, the state tax concern of a non-deductible vs. Roth vs. taxable is mitigated – retirement income won’t be taxed (or only minimally). That makes a non-deductible IRA slightly more attractive there than it would be in, say, California. |
| States Following Federal (e.g. CA, NY) | Most states mirror federal rules: if you deduct federally, you deduct state; if you contribute non-deductible, you’ve paid state tax on that money already and they’ll only tax the earnings later. No special treatment – your Form 8606 helps here too. RMDs and conversions are generally taxed by these states to the same extent they are federally. |
As you can see, where you live can influence the details, though the federal rules are the primary driver of the decision to contribute or not. Always consider consulting a tax advisor who knows your state’s rules, especially if you have a large IRA and live in a state with unique tax laws.
Lastly, let’s not forget the people behind the Roth IRA’s existence: Senator William Roth of Delaware gave his name to the Roth IRA. His legacy is the concept of paying taxes now for tax-free gains later – a principle many now use the backdoor strategy to achieve. And figures like Ben Franklin would remind us of the famous quote: “In this world nothing can be said to be certain, except death and taxes.” – The non-deductible IRA doesn’t dodge taxes, it just moves them around. Our goal with all these entities and laws in mind is to minimize taxes legally and maximize our after-tax wealth for retirement.
FAQs – Real Questions from Real People (Reddit Edition)
To wrap up, here are some common questions about non-deductible IRA contributions, inspired by everyday folks on forums like Reddit – answered in a flash:
Q: Should I be making non-deductible IRA contributions?
A: Yes, if you’ve maxed out other retirement accounts and plan to convert it to a Roth IRA. No if you haven’t used up better options or won’t convert – the benefits are limited. (👍 Pro Tip: Backdoor Roth is the main reason to do this.)
Q: Are non-deductible IRA contributions worth it?
A: No, not on their own. Without a Roth conversion, the tax hassles and ordinary income tax on growth make non-deductible IRAs barely worthwhile. You’re usually better off with a Roth, 401(k), or even a taxable account.
Q: Non-deductible IRA or brokerage account – which is better?
A: Yes, choose the IRA if you need tax-deferred growth or are using it for a backdoor Roth (tax shelter wins). No, go brokerage if you want easy access and lower capital gains tax on investments. It hinges on your tax bracket now vs. later.
Q: Is there any reason to contribute to a Traditional IRA if I’m over the MAGI limit for a Roth?
A: Yes – you can still contribute to a Traditional IRA (even if it’s non-deductible) and then do a Roth conversion. This backdoor route is a key reason high earners contribute to an IRA at all.
Q: Do I pay taxes twice on a non-deductible IRA?
A: No, not if you do it right. You pay tax on the money going in (since it’s after-tax). Later, when you withdraw, you don’t pay tax on that same principal again – only on the earnings. Just remember to file Form 8606 to prove those contributions were already taxed.
Q: Can I contribute to an IRA if I maxed my 401(k)?
A: Yes! Maxing your 401(k) doesn’t prevent you from also contributing to an IRA. The only question is deductibility. If your income is high due to maxing 401k and you’re covered by that plan, your IRA contribution might be non-deductible – but you can still make it and then decide if converting to Roth makes sense.