Nondeductible IRAs: Worth the Bother?

High-income individuals don't have the option of deducting IRA contributions. Does it still make sense to use IRAs at all?

Mar 15, 2014 at 4:45PM

Traditional IRAs can be a great way to get a last-minute tax deduction, but high-income taxpayers often aren't entitled to deduct IRA contributions. If that's the case, does it still make sense to contribute at all?

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at nondeductible IRAs and whether they make sense. Dan notes that if you can use the backdoor Roth IRA strategy to convert a nondeductible traditional IRA to a Roth without paying tax, then it definitely makes sense to consider nondeductible IRAs. But for others, the big problem with the nondeductible IRA is all distributions in retirement are taxed at ordinary rates, whereas even a normal taxable account gets preferential rates for dividends and long-term capital gains. Dan concludes that in general, you'll do better in a taxable account than using a nondeductible IRA if you can't convert it to a Roth without huge tax hassles.

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Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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