Save time with our cheat sheets, fact sheets, checklists & books!

January 28, 2014

Nondeductible IRA Contribution

Your Guide

Share on print
Print
Share on facebook
Share on twitter
Share on pinterest
Share on linkedin

Definition

An IRA contribution for which no tax-deduction is allowed or claimed (nondeductible).

Eligibility for Nondeductible IRA Contribution

An individual who is not an Active Participant, nor married to an active participant is eligible to take a full deduction for contributions to a Traditional IRA providing the contribution is within the statutory limit for the year. The deduction is claimed on the individual’s tax return.

If the individual is an active participant or married to someone who is, his/her eligibility to deduct a traditional IRA contribution is determined by his/her tax filing status and modified adjusted gross income (MAGI).

An individual can choose to treat an IRA contribution as nondeductible, even if he/she is eligible to claim a deduction for the amount.

Referring Cite

IRC § 219(a) , IRC § 219 (b)

Additional Helpful Information

  • Distributions of nondeductible IRA contributions  are not subject to income tax or the early distribution penalty.
  • For any year that an individual makes nondeductible contributions or rollover after-tax amounts to his/her traditional IRA, he/she should file IRS Form 8606.
  • Form 8606 helps the individual to track the after tax/nondeductible amounts so that these amounts are not taxed when distributed from the traditional IRA.
  • Form 8606 must also be filed for any distributions that occur , beginning the year the after-tax/nondeductible amount is credited to the traditional IRA, until all the basis is distributed , and must be filed for any year that an individual takes a distribution from any of his traditional IRA, SEP IRA or SIMPLE IRA, if that individual has basis in any of his traditional or SEP IRAs . This helps to determine the non-taxable portion of the distribution. Note: A SIMPLE IRA should not include any basis, as IRA contributions cannot be made to a SIMPLE and rollover (from a qualified plan, 403(b) plan or 457 plan) –including after-tax or other amounts cannot occur in a SIMPLE IRA.  Since these are the only two sources of after-tax (nontaxable) IRA balances, SIMPLE IRAs should not hold these amounts.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

Share on facebook
Share on twitter
Share on pinterest
Share on linkedin
Share on print
More

Keep Learning

Deduction

Definition A deduction is a Tax write-off which is allowed for contributions to traditional IRAs or employer sponsored plans. Individuals who are active participants are

Annual Addition Limit

Definition The annual Addition limit is the maximum amount that may be added to a defined contribution plan on behalf of a participant for any

SIMPLE 401(k) Plan

Definition A SIMPLE 401(k) plan is a 401(k) plan  established by a small business for it’s employees. Earnings accrue on a tax-deferred basis and distributions

Salary Deferral Contribution

Definition A contribution made pursuant to a participant’s election to have a portion of his/her salary/wages  contributed to his/ her employer sponsored plan  rather than

Be among the first to know when

IRA Rules
Change