Nondeductible Contributions to Traditional IRA
A traditional IRA allows you to save money for retirement, with income taxes deferred until you make withdrawals. However, some people cannot claim tax deductions for contributions made to the account, and others choose not to.
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Identification
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Nondeductible contributions can be made to a traditional IRA out of necessity or choice. You cannot deduct a contribution on your income taxes if you or your spouse can contribute to a work-sponsored retirement plan and your modified adjusted gross income exceeds the annual limits. Even if you are eligible, you can elect to make a nondeductible contribution. You can't contribute more than the annual limit allowed for IRAs.
Effects
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When you take a withdrawal from your traditional IRA, the percentage that comes from nondeductible contributions is tax-free. For example, if you have $32,000 in your IRA and $8,000 is from nondeductible contributions, 25 percent of any withdrawal you make is tax-free.
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Benefits
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Nondeductible contributions grow tax-free while they remain in the traditional IRA. If you roll the money into a Roth IRA, you do not have to pay income taxes on the portion of the conversion that comes from nondeductible contributions. You only have to pay taxes on the earnings and deductible contributions.
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