Answers To Your Nondeductible IRA Contribution QuestionsEvery year around tax time questions sometimes surface about your IRA. An important thing for you to think about is what actually is a nondeductible IRA contribution? Basically, a nondeductible IRA is the same as a traditional IRA. First and foremost, you should maximize all of your other IRA options before contributing to a nondeductible IRA. It is reasonable to realize as much money as possible with your initial contributions; then, do whatever is needed to keep your financial future growing. Your future income is a direct result of what you do now to “fill the kitty”. You won’t get a tax deduction today if you invest in a nondeductible IRA. However, in 2010 you will be able to roll over your nondeductible IRA into a Roth IRA making it much more appealing. And, best of all there won’t be any income restrictions associated with your Roth IRA in 2010. The income restrictions that are present today on traditional-to-Roth IRA rollover will disappear. If you have already invested in a nondeductible IRA, then you have already paid the taxes due on your investment. What this means is that when you make the 2010 rollover, you only will be responsible for paying taxes on the earned portion of your new IRA account. This is good news indeed and is a definite plus for investing in a Roth IRA down the road. When you make a nondeductible IRA contribution you won’t of course receive any tax deductions now. The money you invest will continue to grow in your account but the tax on your investment will be deferred until you make a future withdrawal. For some individuals, this is appealing because they eliminate having to pay any taxes today on the money they invest. A Roth IRA may be a better way to go if you are eligible to contribute to it and that is something that you will have to investigate and determine. You need to decide what will work most efficiently for you now. You may be in a high-income bracket because you are still working and are covered by your company’s own retirement plan. If that’s the case, then traditional or Roth IRA’s may not be in your best interests. You might look closely at investing in a nondeductible IRA even though you won’t get a tax deduction. But it does have some benefits for you and worth looking into because the money you invest will grow even though you will pay deferred taxes. You do need to remember however that you will be penalized at 10% if you withdraw any funds before you are younger than age 59 ½. There are pros and cons associated with any investment you make. A nondeductible IRA contribution may be what works best for you today. If so, look into what you can do now to take advantage of this option and pay close attention to changing IRA rules and regulations. Every day brings new challenges to the American economy. |