In a Nutshell
Contributing to an individual retirement arrangement can be an excellent way to lower your taxable income. But if your employer offers a 401(k), you have a high income or you’re contributing to a Roth IRA, your IRA contributions may not be tax deductible. In that case, making nondeductible IRA contributions could still be a good idea, provided you can avoid some common (and expensive) pitfalls.This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma. It has been updated for the 2019 tax year.
Saving for retirement can be a win-win situation: You build your nest egg and maybe get some tax benefits, too.
For example, the contributions you make to an individual retirement arrangement (or IRA) may be tax deductible, provided you meet requirements. But what should you do when you don’t meet requirements for deducting IRA contributions?
Short answer: Even if you can’t deduct your IRA contributions from your federal income taxes, it might still be worth making them anyway.
- What is an IRA?
- What are traditional IRA deduction limits?
- What are the Roth IRA contribution limits?
- What are nondeductible IRA contributions?
- How should I track nondeductible IRA contributions?
What is an IRA?
An IRA is a type of investment or savings account that comes with tax benefits to help you save for retirement. Two basic types of IRAs are available.
- Traditional IRA — This type of account offers a tax deduction for the year in which the contribution was made. Contributions and earnings are taxable income when withdrawn in retirement.
- Roth IRA — There is no available tax deduction associated with Roth IRA contributions. Instead, contributions and earnings can generally be withdrawn tax-free in retirement via qualified distributions.
For 2019, your total IRA contributions are limited to $6,000 (or $7,000 if you’re 50 or older) or your total taxable compensation for the year (whichever is less). So your total contribution limit ends up being whichever of those two amounts is lower.
This limit applies to all of your traditional and Roth IRAs. And it means that your total contributions can’t exceed the $6,000 limit ($7,000 if you’re 50 or older) — even if you have more than one IRA account. It’s a cumulative limit, not a per-account limit.
Each type of IRA has limitations that help dictate which type of account you choose to open. Read on to learn more.
What are traditional IRA deduction limits?
If you (and your spouse, if married) don’t have access to an employer-sponsored retirement plan — like a 401(k) — your contributions to a traditional IRA may be deductible on your federal income tax return. If you or your spouse do have access to a retirement plan at work, your deduction may be limited.
How much of your traditional IRA contributions is deductible is based on your filing status and your modified adjusted gross income, (or MAGI).
Here are the deduction limits for 2019 for those covered by a retirement plan at work. Just keep in mind that if you can take the full deduction, it’s limited by the amount of your contribution limit.
| Filing status | MAGI | Deduction |
|---|---|---|
| Single or head of household |
$64,000 or less |
Fully deductible (up to limit) |
| $64,001–$73,999 | Partially deductible | |
| $74,000 or more | Not deductible | |
| Married filing jointly or qualifying widow(er) | $103,000 or less | Fully deductible (up to limit) |
| $103,001–$122,999 | Partially deductible | |
| $123,000 or more | Not deductible | |
| Married filing separately | Less than $10,000 | Partially deductible |
| $10,000 or more | Not deductible |
If you’re not covered by a retirement plan at work, here are the deduction limits for 2019 (again, if you can take the full deduction, it’s limited by the amount of your contribution limit).
| Filing status | MAGI | Deduction |
|---|---|---|
| Single, head of household or qualifying widow(er) | Any amount | Fully deductible (up to limit) |
| Married filing jointly or separately with a spouse not covered by a work plan< | Any amount | Fully deductible (up to limit) |
| Married filing jointly with a spouse who is covered by a work plan | $193,000 or less | Fully deductible (up to limit) |
| $193,001–$202,999 | Partially deductible | |
| $203,000 or more | No deduction | |
| Married filing separately with a spouse who is covered by a work plan | Less than $10,000 | Partially deductible |
| $10,000 or more | No deduction |
If your contribution is partially deductible, IRS Publication 590-A contains a worksheet that can help you figure your reduced deduction.
What are the Roth IRA contribution limits?
Contributions to a Roth IRA are never tax deductible, but in return, your retirement distributions are tax-free. But you may not be eligible to contribute to a Roth if your income exceeds certain thresholds. Here are the income limits for 2019.
| Filing status | MAGI | Contribution |
|---|---|---|
| Single, head of household or married filing separately and did not live with your spouse during the year | $121,999 or less | Up to the annual limit |
| $122,000–$136,999 | Limited amount | |
| $137,000 or more | None allowed | |
| Married filing jointly or qualifying widow(er) | $192,999 or less | Up to the annual limit |
| $193,000–$202,999 | Limited amount | |
| $203,000 or more | None allowed | |
| Married filing separately (and you lived with your spouse at any time during the year) | $9,999 or less | Limited amount |
| $10,000 or more | None allowed |
If your contribution to a Roth IRA is limited, use the worksheet in IRS Publication 590-A to help you determine your contribution limit.
What are nondeductible IRA contributions?
If you earn too much to contribute to a Roth IRA or to make deductible contributions to a traditional IRA, you can still make nondeductible contributions to a traditional IRA.
Generally people make nondeductible IRA contributions when they’ve maxed out their contributions to an employer-sponsored retirement plan and their income exceeds the phaseout limit to use a Roth IRA or make a deductible IRA contribution, says Justin Stevens, a Certified Financial Planner and President of O’Keefe Stevens Advisory Inc. in Rochester, New York.
“In these circumstances,” Stevens says, “it may still be advantageous to contribute more money to an IRA, even though they won’t receive a tax deduction in the current year.”
Because nondeductible IRA contributions are made with after-tax dollars, they come out tax-free in retirement. In this case, you are only taxed on the earnings portion of your retirement distributions.
For young taxpayers who aren’t eligible to contribute to a Roth IRA, “these deferral benefits may be significant over many years,” say Stevens.
But take care: unless you carefully track your nondeductible contributions and report them to the IRS, you could wind up paying taxes twice on the money you contribute — once when it’s earned and again when it’s taken out in retirement.
The problem is that deductible IRA contributions and nondeductible IRA contributions are often made to the same account, and your IRA custodian (the bank or brokerage where you have the account) isn’t required to track whether the contributions are deductible or not. Once you start taking distributions in retirement, the custodian simply reports the full amount of the distribution to the IRS using Form 1099-R. It’s up to you to calculate the tax-free portion.
How should I track nondeductible IRA contributions?
Every year that you make nondeductible IRA contributions, you are supposed to report those contributions to the IRS using Form 8606. The form establishes your nondeductible contribution basis in the IRA. It is also used to track any subsequent disbursements from your IRA after making nondeductible contributions.
Problems can occur when taxpayers prepare their own tax returns and aren’t aware of Form 8606. Even paid tax preparers may miss the form or be unaware that it was filed in a prior year.
Without Form 8606, the IRS has no record of how much after-tax contributions you’ve made. The burden is on you to prove that you made them.
You can also be penalized for failing to file Form 8606 to report a nondeductible contribution. The penalty is $50 unless you can show reasonable cause for your failure to file. If you overstate your nondeductible contributions on Form 8606, you may be fined $100 unless you can show reasonable cause.
Bottom line
When you can’t deduct your contributions to a traditional IRA, there may still be future tax benefits for making nondeductible contributions. Just remember, all your IRA contributions — whether deductible or nondeductible, to a traditional or Roth IRA — can’t exceed a total of $6,000 per year ($7,000 if you’re 50 or older) for 2019.
If you’ve made nondeductible contributions in the past but forgotten to file Form 8606, it’s a good idea to file it now. Gather proof of prior IRA contributions, as well as copies of previously filed Forms 1040 to prove that you did not claim a deduction for the contribution in that year.
Form 8606 can be sent to the IRS as a freestanding form. Just be prepared to pay the $50 penalty unless you have a good explanation for why it wasn’t filed with your original tax return.
Once you report your nondeductible contributions, it’s a good idea to continue filing Form 8606 with your individual tax return every year. Even if you don’t have any reportable contributions or distributions in the current year, the form is a convenient way to document the makeup of your traditional IRA.
Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.