Trad IRA contribution with no deductions
I know there are IRA contribution limits for deductions…someone had asked if they’re maxing their employer plans, should they contribute to their Trad IRA even though he cannot deduct it. Another person said it wouldn’t be wise because if he does that, then that would be after tax money being contributed to the Trad IRA. Explanation please.
Permalink Submitted by Alan - IRA critic on Thu, 2020-05-07 22:21
If the taxpayer’s modified AGI is too high to deduct a TIRA contribution, a regular Roth IRA contribution is always preferable to a non deductible TIRA contribution, as long as the MAGI is not also too high for the Roth contribution.Should the client not qualify for a Roth contribution either, a non deductible TIRA contribution is the final option. This can work out OK for someone who does not already have pre tax IRA dollars, because they can convert the ND TIRA contribution to a Roth tax free. This is the so called “back door Roth” conversion. If the person does have a pre tax TIRA value, the tax free conversion can still be done if the pre tax IRA balance is rolled into an accepting employer plan. If that is not doable either, then the conversion would be mostly taxable, and the taxpayer might want to pass on making the non deductible contribution and having to track IRA basis into the future. In short, in some cases, the contribution makes good sense, in other cases less so.