Not every taxpayer is eligible for a qualified individual retirement account, whose contributions can be deducted from income before taxes are paid. High-income taxpayers, or those covered by retirement plans at work, may be barred from traditional IRAs or have their deductible contributions limited. They still may get some benefits, however, from a non-qualified IRA or non-qualified contributions to their regular IRA.
IRA Income Caps
The Internal Revenue Service caps tax-deductible contributions to a traditional IRA for a couple filing jointly at $183,000 in 2012 or $188,000 for 2013 if the spouse who makes the contribution isn't covered by a workplace retirement plan. The limit drops to $112,000 in 2012 or $115,000 in 2013 if the contributing spouse is covered by workplace retirement.
A couple barred from tax-deductible IRA contributions can still contribute to an IRA and enjoy tax-free growth from earnings until money is withdrawn. That can amount to a sizable savings over a long period, even after taxes are paid when earnings are taken out, typically after age 59 1/2. You also can withdraw those taxed contributions at any time, without either income taxes or a 10 percent early withdrawal penalty.
Non-deductible contributions to a traditional IRA are subject to the same maximum limits as deductible contributions -- $5,000 for 2012 and $5,500 in 2013. Taxpayers over age 50 are allowed another $1,000 in "catch-up" contributions in both years. Those limits double for spousal IRAs, separate accounts for both spouses even if only one spouse contributes.
A taxpayer can make non-qualified contributions to a traditional IRA if income falls into a "phase-out" range in which deductible contributions are reduced gradually as income goes up. For a spouse covered by retirement at work that range is $92,000 to $112,000 in 2012 or $95,000 to $115,000 in 2013. If the contributing spouse doesn't have work retirement, the range is $173,000 to $178,000 in 2012 or $178,000 to $188,000 in 2013.
If the phase-out caps a qualified IRA contribution at $3,000 in 2012, for instance, a taxpayer can take a tax deduction for that amount, then put in another $2,000 in a non-qualified or non-deductible contribution. All non-deductible contributions, however, must be reported to the IRS on a Form 8606.
- IRS: IRS Announces 2013 Pension Plan Limitations
- Kiplinger: Deductible Versus Nondeductible IRA Contributions
- First National Bank Olney: IRA Frequently Asked Questions
- FiGuide: Should I Make Non-Deductible IRA Contributions?
- Bankrate.com: What Is Basis of Nondeductible IRA?
- Motley Fool: Nondeductible IRAs
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.