Non-Deductible Traditional IRA Contributions Explained & Defined
Non-deductible contributions to a traditional Individual Retirement Account (IRA) occur when you are ineligible to take a tax deduction for money you put into your traditional IRA account.
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Reasons
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If you or your spouse is covered by an employer-sponsored plan at work, you may not be eligible to deduct your contributions to a traditional IRA, depending on your adjusted gross income (AGI).
Income Limits
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For 2009, if you are single and covered by an employer plan, you can deduct all of your contribution if your AGI is below $55,000 and a reduced amount if your income is between $55,000 and $65,000. If you are married filing jointly and you are covered by an employer plan, you can deduct all of your contribution if your AGI is below $89,000 and a reduced amount if your income is between $89,000 and $109,000. If you are married filing jointly and only your spouse is covered by an employer plan, you can deduct all of your contribution if your AGI is below $166,000 and a reduced amount if your income is between $166,000 and $176,000. If you are married filing separately, you can only take a limit deduction if your AGI is less than $10,000.
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Misconceptions
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Just because you are ineligible to take a tax deduction for your contributions to your traditional IRA does not mean that you cannot contribute to the account. This is different than the income limits for Roth IRAs because if your earning exceed the limits, you cannot contribute to a Roth IRA at all.
Significance
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If at a later date you want to claim a loss on your traditional IRA account, non-deductible contributions are the only contributions that count toward establishing your account basis for calculating the deduction.
Effects
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Even though you cannot deduct the contribution from your taxes, the money still enjoyed the tax-sheltered status of being in the traditional IRA. All of your earnings are tax-free while they remain in the account.
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