What are the tax implications for a traditional IRA when your AGI is above the threshold that allows any deductions on contributions?

If you file as a married couple, you have an AGI of over $200k, and you want to allocate money into a traditional IRA, will that amount be taxed twice? I understand that our income is above the threshold that allows any deductions on contributions, and with a traditional IRA, both principal and earnings are taxed at withdrawal.

IRAs, Taxes, Tax Deductions / Credits
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January 2018

Madison, John

Ashland, VA
67% of people found this answer helpful

As you mention, even though everyone with earned income (or a working spouse) can contribute to a Traditional IRA, some taxpayers may not be able to deduct the contribution. It appears you fall into that category! Sorry you can't get the deduction but congratulations on having a great income!

All is not lost, though. You can track your non-deductible contributions to your Traditional IRA on IRS Form 8606. When you later take withdrawals from your IRA, you can reduce the taxable income you claim by a prorated share of your nondeductible contributions. This is best illustrated by example. Assume you contribute $5,000 to a Traditional IRA and are unable to deduct the contribution. Years later, the IRA has grown to $20,000 (with no additional contributions). The non-deductible contribution percentage of the IRA balance is 25% ($5,000/$20,000), therefore, when you withdraw, for example, $8,000 from the IRA, you will only pay tax on $6,000 as the other $2,000 represents a return of your non-deducted contribution.

If you have no other IRA's when you make the non-deductible contribution, you could then do a Roth conversion with little to no tax due. It won't allow you to deduct the contribution this year, but at least the funds will grow tax-free into the future (assuming you follow the Roth IRA rules, of course).

Thanks for your question!

January 2018
January 2018
January 2018