Michael Rubin is a Certified Financial Planner (CFP) and a Certified Public Accountant (CPA) with more than 25 years of experience in the retirement planning, investment strategy, and tax planning industries. He also holds an MBA from the Kellogg School of Management at Northwestern University.
Updated on April 21, 2022 In This Article In This ArticleCouple reviewing the balance in their IRAs at a laptop at home" width="3863" height="2578" />
You might not be able to deduct contributions to your traditional IRA from your taxable income if your income exceeds certain levels. The amount you can save may be limited as well, but you can still save for your retirement with contributions that you don't deduct.
You can defer taxes on the earnings and growth of your savings, just as you can with the rest of the money you've saved there. But your nondeductible contributions won't reduce your taxable income in the year you make them.
The growth on your savings can be very good, even if you don't receive a tax break right away. That can make the contribution worthwhile in the long run if you expect to have a lower tax rate after you retire than you do now. You may want to pay taxes on earnings as you go, rather than defer taxation to a later time, if you expect your income and your tax rate to increase.
You'll pay taxes on the growth when you take your standard IRA distributions during retirement, but any savings that you didn't deduct are treated as your basis in the asset. You paid tax on that money at the time you saved it, so you won’t have to pay tax on it again later.
The IRS keeps track of filers who have paid taxes on nondeductible savings by requiring that they file Form 8606 with their tax returns.
Suppose you made a $2,000 contribution one year ago that you didn't or couldn't deduct. Your account balance increases to $20,000 by the time you make a withdrawal, thanks to deductible contributions you made and investment growth.
Only $900 of that money would be taxable income to you in this case if you were to make a $1,000 withdrawal during retirement, because 10% ($2,000 divided by $20,000) was your basis. This is a return of the portion of your savings that you didn't deduct.
Rules for IRA savings can be complex, and they adjust for inflation. It pays to review them each year.
You can put a combined total of $7,000 into traditional and Roth IRAs in 2021 or 2022 if you're age 50 or older. You can put a combined total of $6,000 into your traditional and Roth IRAs in 2021 or 2022 if you're age 49 or younger. These limits don't apply when you roll over funds from one account to another, or to qualified reservist repayments.
The IRS will levy a 6% excise tax on the excess amount each year until you remove those savings if you save more than your yearly limit.
You may not be able to deduct all that you save to a standard IRA, because you face certain income limits if you're employed by a company that offers a workplace retirement account, such as a 401(k) or 403(b). This is the case regardless of whether you choose to participate in the workplace plan. These adjusted gross income (AGI) limits increase a little each year to keep pace with inflation.
You can claim the full deduction if you're filing as single or head of household, and if your AGI is $66,000 or less as of 2021. That increases to $68,000 for tax year 2022.
You can also claim the full deduction if you're married filing jointly or a qualifying widower, and if your AGI is $105,000 or less in 2021, or $109,000 or less in 2022. You can take the full deduction if your AGI is $198,000 or less in 2021 if you're married filing jointly, and if your spouse is covered by a plan through work, but you're not. This threshold increases to $204,000 in 2022.
You can claim only a partial deduction if you're married and filing a separate return, and if your AGI is less than $10,000.
Deductions are phased out from these thresholds as your income rises. You're subject to more stringent income rules if you're married and filing a separate return, although you're treated as a single payer by the IRS for these limits if you've lived apart from your spouse for the whole tax year.
You can make deductible IRA contributions as long as you (or your spouse) have any earned income if neither of you can participate in a workplace plan. It doesn't matter how much you earn.
You may still be able to save to a Roth IRA if you're covered by an employer-sponsored 401(k) and have income exceeding the limits for a regular IRA deduction. Roth IRAs have much higher income limits.
It often makes sense to make a Roth IRA contribution rather than a nondeductible IRA contribution in this case. You can't deduct either of them, but tax on the savings is deferred with a standard IRA—you'll pay taxes on that money later—while Roth IRA savings grow tax-free.
Choosing the best approach for your savings can be an ongoing process. It can depend on your age, your income, and your retirement goals. Consult a professional to help you decide the best way to achieve tax-advantaged savings.
Use IRS Form 8606 to report nondeductible IRA contributions for the year when you file your annual tax return.
The maximum amount you can contribute to all of your IRA accounts combined is $6,000 per year ($7,000 if you're 50 years or older) or your total taxable income, whichever is less. The limit applies whether you're contributing to a Roth or traditional IRA and whether your contributions are deductible or not.
Was this page helpful? Thanks for your feedback! Tell us why!The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Couple reviewing the balance in their IRAs at a laptop at home" width="272" height="182" />
A Guide to Nondeductible IRA Contributions Learn How to Make a Spousal IRA Contribution Can You Have a Traditional and a Roth IRA? Everything You Need to Know About Annual IRA Contribution Deadlines Minimum and Maximum Age Limits for IRA Contributions 5 Kinds of IRA Withdrawals and Their Rules Taking Money Out of an IRA How Taxes on Traditional IRA Distributions Work Traditional IRA Withdrawal and Distribution Rules How to Make an Early Withdrawal From Your IRA Without Paying the Fee Can You Borrow Against an IRA? What Are Your Options? Related Articles SEP-IRA Contribution Limits and Deadlines How to Calculate Your Modified Adjusted Gross Income Why You Should—and Should Not—Max Out Your 401(k) IRA vs. 401(k): What’s the Difference? How Much in Taxes Should I Withhold From My Pension? Should You Max Out Your 401(k) or Your Roth IRA First? At What Age Can I Withdraw Funds From My 401(k) Plan? How to Calculate Taxes on Retirement Income How the Social Security Benefits Calculation Works Do I Need Earned Income for Roth IRA Contributions? Understanding Your Individual Retirement Account (IRA) What Is an Average Roth IRA Return Rate? Minimum and Maximum Age Limits for IRA Contributions Roth IRA vs. Pre-Tax Contribution: What’s The Difference? Rules for Investing in a Custodial Roth IRA 6 Strategies To Make the Most of Your Roth IRA The BalanceWe and our 100 partners store and/or access information on a device, such as unique IDs in cookies to process personal data. You may accept or manage your choices by clicking below, including your right to object where legitimate interest is used, or at any time in the privacy policy page. These choices will be signaled to our partners and will not affect browsing data.
Store and/or access information on a device. Use limited data to select advertising. Create profiles for personalised advertising. Use profiles to select personalised advertising. Create profiles to personalise content. Use profiles to select personalised content. Measure advertising performance. Measure content performance. Understand audiences through statistics or combinations of data from different sources. Develop and improve services. Use limited data to select content. List of Partners (vendors)