5 Tips on Nondeductible IRAs and Taxable Accounts


In last week’s post, 6 Ways the New Tax Rules Affect Your Retirement, I covered the updated IRS regulations for retirement accounts, such as workplace plans and IRAs in 2019. I received several questions from readers about how to choose the best account.

Harish says, “I don’t qualify for the tax benefits of an IRA because of my income. Is there any advantage in investing in an IRA with no tax benefits instead of using a regular brokerage account?”

Marta says, “I max out my 401(k) at work every year and still have more to invest. If I contribute to a traditional IRA I understand that I don’t get a tax deduction. But I can’t contribute to a Roth IRA because I earn too much. What should I do?”

Arthur asks, “I maxed out my 401(k) for the year and want to know if I can also max out an IRA. If so, would my IRA contributions also be tax-deductible?”

In this post, I’ll explain what to do when faced with the choice of a nondeductible IRA or a taxable brokerage account. You’ll learn five tips for choosing the best types of retirement accounts for you and your family.

Nondeductible IRA or Taxable Account? 5 Tips to Know Which Is Best

  1. Max out a retirement plan at work first.
  2. Use a traditional IRA when it’s fully deductible.
  3. Use a Roth IRA when you qualify.
  4. Use a non-deductible IRA as a last resort.
  5. Consider converting a non-deductible IRA to a Roth.

The best retirement account(s) for you vary based on what’s offered at your job or a spouse’s job, whether you’re self-employed, how much you earn, and your tax filing status. Review each of these tips for a guide to choosing the right vehicles to fund and grow your retirement nest egg.

1. Max out a retirement plan at work first.

If you have any type of retirement plan offered by an employer, such as a 401(k), 403(b), 457, or TSP, it should always be your go-to savings account. Not only can you contribute more than you can with an IRA, but your employer may also contribute additional, free matching funds.

The 2019 workplace retirement account limits are increasing to $19,000, or $25,000 if you’re over age 50. IRAs are great, but the contribution limits are only up to $6,000, or $7,000 if you’re over age 50.

So always opt to max out a workplace plan when you can. Once you’ve contributed the annual retirement limit at work, then it’s time to turn your attention to other options, such as a traditional or a Roth IRA.

Once you’ve contributed the annual retirement limit at work, then it’s time to turn your attention to other options, such as a traditional or a Roth IRA.

Also note that if you have a Roth account at work, you’re eligible no matter how much you earn. Unlike a Roth IRA, which comes with annual income limits, a Roth 401(k) or a Roth 403(b) doesn’t have any income requirements. The main benefit of a Roth is that you pay tax upfront on contributions, but can take withdrawals in retirement that are completely tax-free.

A common question is what to do if your employer doesn’t offer matching. Even if your employer is stingy, I’m still a proponent of maxing out a workplace retirement plan. These accounts offer too many benefits to ignore, including:

  • Convenient automatic payroll deductions
  • Broad federal legal protections under the Employee Retirement Income Security Act of 1974 (ERISA)
  • Guidance from your employer or the plan’s administrator

So don’t pout if there aren’t any matching funds and keep saving as much as you can. If you max out a retirement account at work and still have more to invest, bravo!

Keep reading to understand the choices you should make next. And if you don’t have a job with a retirement plan, these tips will also help you choose the best account for your situation.