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January 28, 2014

Nondeductible IRA Contribution

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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.
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