Nondeductible IRA – When Are They Useful?
Is a nondeductible IRA useful, or should this be avoided at all costs? This type of retirement account does not offer tax free distributions like a Roth IRA does, or the up front tax advantages that the traditional IRA deduction allows. Without these benefits why would someone choose a nondeductible account type? You may not be eligible for a Roth or traditional deductible IRA, because of specific IRA withdrawal rules and contribution regulations, and this can be caused by a higher than allowed income or because there is an employer sponsored plan in place. There are some cases where a nondeductible IRA can be useful, even though this account type is not usually recommended in most situations.
A retirement savings calculator can help you determine how much you will need to contribute each year so that you have the financial resources needed in your retirement. If you have a high income and you are covered by an employer retirement plan at your job then you may not be eligible for a Roth or traditional deductible IRA. In this situation a nondeductible IRA may be useful in certain circumstances. If you are already age fifty nine and a half years old then you are allowed to make account withdrawals without any penalties, and the nondeductible choice may be the best IRA accounts.
A nondeductible IRA may also be useful if you plan on converting this account into a Roth IRA within a year, because of changes in the rules concerning this type of account with higher income earners. The limit for conversion to a Roth IRA was one hundred thousand dollars in income, but that changed in 2010. Some investors found it useful to choose a nondeductible account for conversion benefits, but this is not the case any more in a majority of cases. An education IRA, which is intended for educational expenses and which allows withdrawals without penalty for this purpose, may be an alternative as well.