[USER]

If you make too much to qualify for a tax deduction for funding a traditional IRA, is there any long-term benefit? Or is regular investing the best option?

[Christopher]

Gains are tax deferred, but all treated as income later, so it’s only useful if you’re in a lower bracket in retirement. A regular taxable account is usually fine in these cases (they’ll be taxed now, but no RMD issues in the future and no penalties for accessing funds whenever).

If you have a 401k at work that allows you to roll in the pre-tax traditional Ira balance, you can do that, and then do a backdoor roth conversion.

[Cody]

Do you have other pre-tax IRA balances?

If no, consider backdoor Roth IRA contributions.

If yes, do you have access to a workplace retirement plan?

Otherwise: If you make a non-deductible Traditional IRA contribution, you benefit from tax-deferred earnings. But it’s a benefit often not worth the hassle.

You can check also: Rollover 401k to Roth IRA or Traditional?

[Sean]

Generally, not worth it to use a traditional Ira when you don’t get a tax deduction. Better to do a Roth IRA or backdoor Roth IRA.

[Jasmine]

I’ve been looking into the same thing myself. Given that all my Trad IRA contributions were non-deductible, my understanding is that I can convert the entire Trad IRA balance to Roth, and only owe tax on the growth.

I actually just did this recently, so now my Trad IRA is empty and I’ll be good to go for a proper/clean backdoor next year.

[Amy]

Most people in this situation start using the backdoor Roth IRA. You’re not getting the tax deduction so you may as well move that post-tax contribution into a Roth IRA.

The catch is that to use the “backdoor” you need to have a $0 balance in all pre-tax IRAs (traditional, rollover, SEP, etc.). That means either rolling your pre-tax IRAs into a current employer’s 401k or doing regular Roth conversions (through the front door) to empty out the pre-tax IRAs.

If you currently have both pre-tax and post-tax dollars in your pre-tax IRAs, any amount you convert from pre-tax to Roth is taxed proportionate to the amount of pre-tax dollars in the IRA. This is called the pro rata rule. It’s also described as the “cream in the coffee” problem. Once pre-tax and post-tax dollars are mixed in an IRA, the IRS says they cannot be separated when taking a distribution.

Worth a look: Roth IRA conversion advice for retired couple: Larger conversions now or let it grow for inheritance?

[Chris]

Backdoor Roth!

[Author]

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