What are the advantages and disadvantages? What I recall, the best I can, from my tax guy, is this: Zero tax due to Uncle Sam on 1040 means there's no tax bill to deduct FROM. But the year's (Trad.) IRA contribution amount is segregated in the records, somehow..... So that, when the money is eventually drawn upon, it will be counted as income, but non-taxed income. Is this accurate? Let me presume to just ask responders to answer as if in a vacuum. Our situation will not be changing much in the future. Thanks.
Comments
- If you've got $0 taxes, the odds are very high that your AGI is low enough to qualify for a Roth contribution. That's always better than a nondeductible contributions. No RMD, no taxes on earnings.
- All money, including the nondeductible contributions in a Trad IRA are subject to RMDs.
- You keep track of your total nondeductible contributions over the years on Form 8606. (Not the broker's job.) Each year you take distributions and/or make Roth conversions, a fraction of that is not taxed.
Say you've got a total of $100K in your traditional IRAs, and you made a total of $5K in non-deductible contributions. Then 5% of your distributions/conversions are non-taxable.
Pros and cons:
If you qualify for a Roth (low enough AGI), there's no advantage to a nondeductible contribution that I know of.
If your income is too high, you can make a "backdoor" contribution to a Roth by making a nondeductible contribution and then doing a Roth conversion. This only works well if you've got little or no pre-tax money in your traditional IRAs.
If neither is true (too high AGI for Roth, and too much in trad IRAs for backdoor Roth), you're usually better off investing the money in a tax-efficient fund or individual stock than in a nondeductible IRA. That's because the IRA earnings are taxed as ordinary income rather than cap gains, and you're not getting any tax break on the contribution itself.
NOTE: Regardless of what IRA you contribute to, you're required to have compensation (earned income or alimony) in order to contribute.
If you're planning on leaving money to charities, you're usually better off keeping that money in a traditional IRA. You won't have to pay taxes on the IRA when you make your contributions (unlike contributing to a Roth), and when a charity inherits the traditional IRA it can pull the money tax-free (same as with a Roth).
Nevertheless, given a choice between a nondeductible contribution to a traditional IRA and a (nondeductible) contribution to a Roth, the latter wins.