An IRA limits you to certain types of investments and your account must be supervised by a custodian or trustee. An account other than an IRA doesn't require you to answer to a trustee, and it's easier to make your own investment decisions. The Internal Revenue Service refers to individual retirement accounts (IRAs) as qualified plans, while non-IRA structures are unqualified plans. As a qualified plan, the IRA is subject to certain regulations that apply to all qualified plans, such as 401 (k) and 403 (b) plans.
Like consumer savings plans, the IRA has its own specific regulations. Non-qualified savings and investment accounts don't have a tax-qualifying advantage. No matter what stage of life you're in, it's never too early to start planning for your retirement, as even the small decisions you make today can have a big impact on your future. While you may have already invested in an employer-sponsored plan, an Individual Retirement Account (IRA) allows you to save for your retirement in parallel and also potentially save on taxes.
There are also different types of IRA, with different rules and benefits. With a Roth IRA, you contribute money after taxes, your money grows tax-free, and you can generally make tax-free and penalty-free withdrawals after age 59 and a half. With a traditional IRA, you contribute money before or after taxes, your money grows with deferred taxes, and withdrawals are taxed as current income after age 59 and a half. Non-deductible IRAs are subject to the same annual contribution limit as other IRAs.
However, your contributions to a non-deductible IRA are made with after-tax money, while your contributions to a traditional IRA or 401 (k) can be deducted in the year they are made. One of the best reasons to contribute to a non-deductible IRA is to take advantage of the opportunity to make clandestine contributions to a Roth IRA. You can contribute to a non-deductible IRA and then convert to a Roth IRA to deposit money into the tax-advantaged account. Even so, you may want to contribute to one so that your money grows without having to pay capital gains taxes or take the opportunity to convert your invested funds into a Roth IRA.
Non-deductible IRAs don't offer the income tax-exempt withdrawals offered by a Roth IRA or a Roth 401 (k). Remember that you can't invest money in a Roth IRA if your income is too high, but Roth IRAs are a valuable retirement savings tool, allowing you to increase your invested funds tax-free and withdraw your earnings as a retiree without paying taxes, as long as you follow certain rules. In addition, regardless of your participation in a work plan, income that exceeds a certain threshold makes you ineligible at all to contribute to a Roth IRA. To determine if you're limited to a non-deductible IRA, start by calculating your modified adjusted gross income (MAGI).
Since contributions to a Roth IRA are made with after-tax money, there is no tax deduction regardless of income. When considering whether a traditional or Roth IRA is right for you, one of the key decision points is when you want to pay income taxes on your savings. However, in order for the IRS to know that you have contributed money after taxes, you must declare your non-deductible IRA contributions each year using the IRS Form 8606. A non-deductible IRA is a retirement savings account that you contribute money to after taxes, but that allows you to increase your retirement money tax-free until the profits are withdrawn.
If you don't qualify to contribute to tax-advantaged retirement accounts because of your (or your spouse's) income, contributing to a non-deductible IRA provides a convenient way to save and increase your money tax-free until your income is withdrawn when you retire. Employer plans have been developed over time and some use the structure of an IRA in a small employer environment, such as the simplified employee IRA (SEP) or the employee savings incentive compensation plan IRA (SIMPLE). .