Non-Deductible IRA

What is a Non-Deductible IRA Retirement Plan?

A Non-Deductible IRA Retirement Plan is a type of Individual Retirement Account where contributions are made with after-tax dollars, meaning they are not tax-deductible in the year they are made. Unlike Traditional IRAs, which offer tax deductions for contributions, non-deductible IRAs do not provide immediate tax benefits. However, the primary advantage of a non-deductible IRA is that the investments grow tax-deferred, meaning you do not pay taxes on the earnings until you withdraw the funds during retirement. This can be beneficial for individuals who do not qualify for a Roth IRA due to income limits or who are covered by a retirement plan at work and exceed the income thresholds for deductible contributions to a Traditional IRA. At retirement, the portion of the withdrawal that represents contributions is not taxed again, but any earnings are taxed as ordinary income.

What Are the Benefits of a Non-Deductible IRA Retirement Plan?

Opting for a non-deductible IRA retirement plan is a way to maximize your investments and savings over an extended time. This is ideal if you’ve maxed out contributions to other retirement savings plans, such as your 401k or your Roth IRA. Notable advantages of a deductible IRA retirement plan include:

• No Contribution Income Limitations: With a traditional Roth IRA retirement system, you may have income limits for contributions and eligibility. A non-deductible IRA can be contributed to regardless of your current earnings and net income.
• Tax-Deferred Investment: With a non-deductible IRA, you can enjoy tax-deferred investments that do not require you to pay any interest, earnings, or dividends on your account until you choose to retire and/or withdraw the funds directly.
• Conversion Opportunities: If you can no longer contribute more to your standard Roth IRA, you may be able to convert a non-deductible IRA to a Roth IRA.

Drawbacks of a Non-Deductible IRA Retirement Plan

As with any retirement plan, it’s important to compare both the benefits and drawbacks of each option. This will provide you with valuable insight into the direction you should go based on your current income, your savings, and the lifestyle you intend to lead well into your retirement. Some common drawbacks of non-deductible IRA retirement planning include:

• Fewer Immediate Benefits: Because you opted for a non-deductible IRA retirement plan, you will not see an immediate tax reduction.
• Taxation During Withdrawal: Once you’re ready to withdraw some or all of your non-deductible IRA retirement funds, you must be prepared for taxation. All withdrawals from non-deductible IRA accounts are currently subject to income tax.
• RMDs: Once you reach the age of 73 (or 72 if you turned 72 prior to January 1, 2023), you will be required to begin accepting minimum taxable distributions from your non-deductible IRA.

Who is a Non-Deductible IRA Retirement Plan Right For?

Choosing the right retirement plan can feel overwhelming if you’re unsure of where to begin. Those who can benefit from a non-deductible IRA retirement plan may include:

• Big Savers: Non-deductible IRA retirement plans are ideal for those who wish to contribute beyond the limits of a standard retirement fund, such as a traditional 401k or Roth IRA.
• Conversion Seekers: Individuals who are planning for a Roth conversion may want to consider a non-deductible IRA plan.
• Business Owners, Investors, and High Earners: Those whose income exceeds the limits for a standard deductible IRA contribution may want to consider a non-deductible IRA retirement plan.

If you’re interested in learning more about optimal retirement paths or if you’re considering a non-deductible IRA retirement planning system, contact Pathfinder Retirement today. You can also take our retirement assessment quiz to determine which route may be best for you. We will help you determine if a non-deductible IRA retirement plan is right for you based on your lifestyle, financial goals, and individual needs.