Dear Dr. Don,
I participate in an employer-sponsored 401(k) plan and I do max out my contributions. My income is such that I cannot contribute to an IRA due to phaseouts. Would it be worthwhile for me to contribute to a nondeductible IRA? If so, how much can I contribute?
-- Marv Motivated
Dear Marv,
Even if you can't make a deductible contribution to a traditional individual retirement account, you can make a nondeductible contribution to a traditional IRA, regardless of your income, up to the contribution limits for an IRA.
This gets interesting in the 2010 tax year and beyond, because you can then convert your traditional IRA to a Roth IRA. It's beyond me why the government didn't remove income limits for the Roth IRA but did remove the income restrictions for the Roth IRA conversion. The current system forces high-income earners to take an extra step each year if they want to convert.
Here's what IRS Publication 590, Individual Retirement Arrangements, says about these contributions:
Nondeductible Contributions
Although your deduction for IRA contributions may be reduced or eliminated, contributions can be made to your IRA of up to the general limit or, if it applies, the spousal IRA limit. The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution.
You must designate this contribution as a nondeductible contribution by reporting it on Form 8606. The IRS Web site also provides the "2009 IRA Contribution and Deduction Limits" and "2010 IRA Contribution and Deduction Limits."
It's easy to recommend that people contribute at least up to the limit of their employer's matching contribution in the employer plan. Beyond that, you need to decide whether you like the tax deferral of the 401(k) or the tax-free growth of the Roth IRA. Read Bankrate's "7 steps to a 2010 Roth IRA conversion" for additional information on conversions.
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