Though most people make deductible contributions to their traditional IRAs, the Internal Revenue Service allows you to make nondeductible contributions instead. If you have an employer plan and your modified adjusted gross income is too high, you have to make nondeductible contributions if you want to contribute at all. A nondeductible contribution to a traditional IRA does not result in new taxes, it simply does not allow you to claim an income tax deduction for your contribution. If considering making a nondeductible contribution instead of a deductible contribution, you can calculate how much extra you would save on your taxes if the contribution is deductible instead.
Determine your marginal income tax rate based on your taxable income for the year and your income tax filing status. You can find the income tax rate schedules in IRS Publication 17. These tables change each year. For example, as of the time of publication, if you had a taxable income of $140,000 and you file as head of household, your margin tax rate equals 28 percent.
Multiply the marginal tax rate by 0.01 to convert the tax rate to a decimal. In this example, multiply 0.28 by 0.01 to get 0.28.
Multiply the marginal tax rate as a decimal by the amount of your nondeductible IRA contribution to find the income taxes you have to pay because you did not deduct your contribution. In this example, if you made a nondeductible $3,800 contribution, multiply $3,800 by 0.28 to find the tax deduction would have saved you $1,064.
- When you take money out of your traditional IRA, you do not have pay income taxes on the part of the withdrawal that comes from your nondeductible contributions, so you do not have to pay taxes twice.
- Make sure you report your nondeductible contributions with IRS Form 8606 when you file your income taxes.