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5 Tips on Nondeductible IRAs and Taxable Accounts

Laura covers five tips for choosing the best types of retirement accounts for you and your family. Having more than one account is awesome, but the rules to qualify can be a little tricky. 

By
Laura Adams, MBA
8-minute read
Episode #571

2. Use a traditional IRA when it’s fully deductible.

A traditional IRA is a great choice when you need an upfront tax break. Your contributions may be tax-deductible, even if you don’t itemize deductions on your tax return. Plus, a traditional IRA has no income limit, which makes it a smart choice when you’re a high earner who doesn’t have a workplace plan or even when you’re self-employed.

Harish said his income is too high for an IRA, but didn’t mention if he has a retirement plan at work. If not, he could get the full tax deduction with a traditional IRA because it doesn’t come with an income limit.

However, when you or a spouse have a workplace retirement plan, the deductibility of your contributions to a traditional IRA may be reduced or eliminated based on your income. Arthur asked if his IRA contributions would be deductible when he maxes out a 401(k). Here are the limits you need to know.

For 2019, if you’re a single taxpayer with modified adjusted gross income (MAGI) over $74,000, you can’t deduct any traditional IRA contributions when you also participate in a retirement plan at work. This is the case no matter if you max out the plan or not.

If you’re married, file taxes jointly, and have your own workplace retirement plan, you can’t deduct traditional IRA contributions when your household MAGI exceeds $123,000. And if you don’t have a retirement account at work but your spouse does, traditional IRA contributions are not tax-deductible when your household income exceeds $203,000.

To clarify, you can still contribute to or max out both a workplace plan and a traditional IRA in the same year, no matter how much you earn. But you just may not get the full tax benefit for the IRA contributions. I’ll tell you more about making non-deductible IRA contributions in a moment.

3. Use a Roth IRA when you qualify.

Another way to use multiple retirement accounts wisely is to pair your workplace plan with a Roth IRA. But as I mentioned, you can’t contribute to a Roth IRA when your income exceeds the limit for your tax filing status.

For 2019, single taxpayers are shut out of a Roth IRA when they have MAGI above $137,000. If you’re married and file taxes jointly, you are ineligible for a Roth IRA when your income exceeds $203,000.

The Roth offers some nice benefits that can outweigh a traditional IRA. In general, the younger you are and the more time you have before retiring, the more a Roth makes sense.

In general, the younger you are and the more time you have before retiring, the more a Roth makes sense.

But Harish and Marta both mentioned that they earn too much to be eligible for a Roth IRA. When you don’t qualify for a Roth IRA and you also have a workplace retirement plan, you’re left with two account options: a nondeductible IRA or a taxable brokerage account.

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.