There are no income limits to determine who can make non-deductible contributions to the IRA. A traditional IRA has no income limits for making contributions such as the Roth IRA. However, if an investor is covered by an employer's retirement plan (such as a 401k) and earns too much, the amount of their IRA contribution they can deduct may be limited. Basically, that can leave them with their work plan, which is usually deductible and the IRA is not deductible.
Non-deductible IRAs lack many of the advantages of a traditional IRA or a Roth IRA, but they are useful when investors want to save more for retirement than the current limits for deductible IRAs allow. While a non-Roth addition to an after-tax IRA may not be the best option, there are other ways to save for retirement and your other goals. You may still be able to save on a Roth IRA if you're covered by an employer-sponsored 401 (k) and your income exceeds the limits of a regular IRA deduction. In addition to the general contribution limit that applies to both Roth and traditional IRAs, your contribution to the Roth IRA may be limited depending on your reporting status and income.
This investment instrument is useful for investors whose income limits or work retirement plan prevent them from contributing to a traditional or Roth IRA. However, you can still contribute to a Roth IRA and make cumulative contributions to a Roth or traditional IRA, regardless of your age. Otherwise, non-deductible contributions from your IRA can accrue investment gains, and if you convert it to a Roth IRA, you'll owe taxes on that growth. The limit applies whether you contribute to a Roth account or a traditional IRA and whether your contributions are deductible or not.
However, if you or your spouse have access to a 401 (k) plan or similar employer-sponsored account and earn too much to contribute to a Roth IRA, you also earn too much to deduct contributions to a traditional IRA. This is an attractive option because it can reduce investor taxes in the future, as both Roth IRA contributions and profits grow tax-free. This allows you to convert a non-deductible IRA into a Roth IRA without having to pay taxes on all of it, but converting to a Roth IRA would require paying taxes on any untaxable profit or gain before it reaches the Roth account. However, it is possible to convert a non-deductible IRA to a Roth IRA, providing an alternative solution to the income limits of the Roth IRA.
Non-deductible IRAs are also an option for investors who want to spend more on investing than traditional IRAs or Roth IRAs alone allow. While you can't deduct these contributions to reduce your annual tax bill like you can with a traditional IRA or 401 (k) plan, a non-deductible IRA offers some attractive tax advantages when you start withdrawing money in retirement. You can also make contributions to different types of non-deductible, tax-deductible, or Roth IRAs in the same year. In this case, it often makes sense to make a contribution to a Roth IRA instead of a non-deductible contribution to the IRA.