Non-Deductible Traditional IRA Contributions
Learn when and how individuals can make non-deductible traditional IRA contributions below. Find answers to common questions here.
Individuals may make non-deductible IRA contributions if they:
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Are ineligible for IRA deductions due to active participation and income limits, or
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Elect to treat otherwise deductible contributions as non-deductible.
Election to Treat as Non-Deductible
Calculation/designation of non-deductible IRA contributions is made on Form 8606 on the original return. However, it can also be done on an amended tax return filed within the statute of limitations for the year of the original return (Notice 87-16, 1987-1 CB446). There is a $100 penalty for overstating the amount of non-deductible contributions and a $50 penalty for not filing Form 8606 when required. (IRC Sec 6693(b)) The penalties can be waived with reasonable cause. (IRC Sec 6693(c)(3)) There is no provision in the statute requiring these amounts to be indexed for inflation.
Taxpayers who make non-deductible contributions to their Traditional IRAs are creating a basis in the IRA, and when they take IRA distributions in the future, a prorated amount of the distribution will be non-taxable. Copies of the Forms 8606 that were filed will substantiate the amount of the basis. Therefore, clients who make non-deductible IRA contributions should be advised to keep copies of the 8606s indefinitely.
Example - Non-deductible IRA Contribution – In 2023, Harry is single and participates in an employer pension plan; he contributes $6,500 to an IRA. His AGI, before an IRA deduction, was $85,000. Since Harry’s AGI was over $82,999, he can’t deduct any part of the Traditional IRA contribution, but he may designate the contribution as a non-deductible contribution. (In this situation, Harry should consider making a Roth IRA contribution instead of contributing to the traditional IRA.)
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