What Are Nondeductible IRA Contributions?
There are several nondeductible IRA contributions. A contribution to a Roth IRA is non-tax deductible. With its nondeductible IRA contributions, an individual can withdraw his total Roth IRA contributions tax free. The withdrawal of his earnings, although subject to certain limitations is generally free from tax.
The current maximum allowable Roth IRA contribution is fixed at $4,000 for those ages 49 and below and $5,000 for those ages 50 and above. An individual's maximum contribution is determined by his Modified Adjusted Gross Income or MAGI.
For instance if your MAGI is below a fixed level, you can qualify for a maximum allowable Roth IRA contribution, If your MAGI has reached the fixed level, your Roth IRA contribution is subject to reduction or phasing out. If your MAGI overshoots a fixed range, contributions would no longer be allowed.
If you are single and you're MAGI is pegged at a range at $95,000 or below, you can avail of a maximum allowable contribution of $4,000. And if your MAGI is at the range of $99,000-$114,000 you are eligible for a partial or phased-out contribution. A traditional IRA plan holder can retain a nondeductible IRA contribution (regular or spousal). Aside from deductions, the earnings from these contributions are tax-deferred and the nondeductible IRA contribution amounts are not subject to income or penalty taxes upon distribution. Nondeductible IRA contributions for traditional IRA is available to everyone regardless of Adjusted Gross Income level, provided the individual has earned income at least equal to the amount contributed to the IRA. The maximum contribution is the lesser of earned income or $4,000 or $5,000 if you are age 50 or older at year-end. This contribution is not tax-deductible. However, an IRA owner who leaves a nondeductible contribution in the IRA has to keep track of this basis for non-taxability by filing an Internal Revenue Service (IRS) Form 8606, or forms for Nondeductible IRAs, the individual will file it for each year a nondeductible IRA contribution is made. The trustees are mandated to report all of an individual's regular or spousal contributions on IRS Form 5498. Remember that you don't mix deductible and nondeductible IRA contributions in the same IRA account. The earnings on nondeductible contributions would still accumulate on a tax-deferred basis, and when you make withdrawals from your account, you'll be able to receive your original contributions (but not the additional buildup in value over the years) tax-free.
If you do decide to make nondeductible IRA contributions, be aware that in withdrawals from the IRA account after retirement, the withdrawal will include both taxable and nontaxable amounts.
The computation on what percentage of a payment is non-taxable can become complicated or confusing for a layman and you may need the assistance of a professional accountant or tax advisor. A difference between a Roth and a traditional nondeductible IRA, is that in Roth IRA, there are no deductions made to your contributions, however when you withdraw your money, it is tax-free. In traditional nondeductible IRA, there are no deductions on your contributions but in withdrawals you still get to pay tax on investment earnings. You can re-characterize your traditional nondeductible IRA contribution into a Roth IRA, provided he is eligible to become a Roth IRA contributor in order to take advantage of tax-free withdrawals on your retirement savings.
Ira Contribution
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