Converting a nondeductible IRA to a Roth IRA
One of the best reasons to contribute to a nondeductible IRA is to take advantage of the opportunity to make backdoor contributions to a Roth IRA.
Remember, you cannot put money into a Roth IRA if your income is too high, yet Roth IRAs are a valuable retirement savings tool because they enable you to grow your invested funds tax-free and make tax-free withdrawals on earnings as a retiree, provided you follow certain rules.
Nondeductible IRA contributions provide a way around the Roth IRA income limits. You can contribute to a nondeductible IRA, then do a Roth IRA conversion.
A Roth conversion is a simple process if you've made only nondeductible contributions to your IRA. Since you're converting only after-tax dollars, you will not owe any taxes on the conversion. However, if you have pre-tax traditional IRA assets as well, part of the converted funds must be included in your taxable income.
Should you contribute to a nondeductible IRA?
If you aren't eligible to deduct your traditional IRA contribution or contribute to a Roth IRA because of your (or your spouse's) income, contributing to a nondeductible IRA provides a convenient way to save. You can let your money compound tax-free until you withdraw your earnings in retirement.
Just be aware that nondeductible IRAs don't offer the tax benefits other types of accounts do. Make sure you file your IRS forms annually to declare your nondeductible contributions to avoid double taxation when you withdraw funds in retirement.
