Why Non-Deductible IRA Contributions Aren’t Worth It

What is a non-deductible IRA contribution? An IRA contribution will become non-deductible because of the income cap on tax-deductible IRA contributions if they have a 401(k) at work. Although anyone with earned income can save in an IRA on an after-tax basis and still take advantage of tax-deferred growth, it still may not be advisable. Many people end up paying taxes twice.

Are IRA Contributions Tax Deductible?

Depending on your situation, IRA contributions can be made pre-tax or after-tax. Whether the contribution is deductible or nondeductible, the overall contribution limit is the lesser of: $7,500 in 2026 plus a $1,100 catch-up if over 50, or your earned income.

Deductible IRA contributions (pre-tax)

Deductible ITA contributions grow tax-deferred and withdrawals are taxable as regular income. Your contribution reduces your taxable income for the tax year. Income limits determine eligibility for savings in a traditional IRA that qualify for a tax deduction:

• The deductibility phase-out is based on filing status, income (MAGI), and whether or not the individual(s) are eligible to participate in a retirement plan at work. See 2026 limits.
• The amount that qualifies as a deductible contribution may be capped depending on your income

What is a nondeductible IRA contribution? (After-tax)

• If you can’t make a tax-deductible contribution, you can make an after-tax contribution as long as you have earned income
• Nondeductible IRA contributions also grow tax-deferred and investment growth is taxable when withdrawn (but more on this later).
• The contribution does not provide a tax deduction.

Non-deductible IRA vs Roth IRA

There are two ways to make after-tax contributions to an IRA and nondeductible IRAs differ from money in a Roth IRA. In a Roth account, withdrawals are 100% tax-free in retirement if the 5-year holding period is met. In contrast, an after tax contribution to a traditional IRA, adds to your tax basis in the IRA, so when you take money out in retirement, only the small percentage of tax basis is shielded from tax.

This is what creates the recordkeeping issues with nondeductible IRAs. Like pre-tax IRA contributions, Roth IRAs also have income limits that prevent high income taxpayers from saving.

Should You Make Non-Deductible IRA Contributions? 5 Reasons to Skip it

5 reasons to reconsider non-deductible IRAs:

1. Non-deductible IRA contributions complicate taxes when withdrawn
2. Infinite recordkeeping requirements raise risk of double taxation
3. Capital gains tax rates are lower than ordinary income
4. Issues with state tax rules, inherited IRA issues, and RMDs
5. Other types of investment accounts could be better to build wealth

1. How Non-Deductible IRA Withdrawals are Taxed 

Are nondeductible IRA contributions taxed? Yes and no. When you make a distribution, the original nondeductible IRA contribution amount isn’t included in your taxable income, but the earnings and growth from it are.

And when you make both deductible and non-deductible IRA contributions, you’ll still owe taxes on a portion of the withdrawal. Although the exact calculation is more nuanced (see below), essentially consider each distribution as taxable based on the ratio of pre-tax contributions and earnings relative to the full IRA value. In other words, you can’t just take out the after-tax portion, even if you have separate IRAs. This is called the pro-rata rule, and you’ll need to calculate it every year.

Pro-Rata Rule

The IRS pro-rata rule applies to withdrawals from traditional, SEP, or SIMPLE IRAs with tax-deductible and after tax (non-deductible, non-Roth) funds. It doesn’t matter which account the contributions are in or how many accounts you have.

So if you have deductible and non-deductible IRA contributions, you’ll use the pro-rata rule, and a percentage of every distribution will be tax-free with the remaining portion fully taxable.

To calculate the tax-free percentage:

Your Total Basis (e.g., lifetime non-deductible contributions – previous nontaxable distributions) divided by  Total IRA Assets (e.g., balance in all IRAs (except Roth) as of 12/31 + all distributions in the current year + outstanding rollovers)

To find the tax-free dollar amount, multiply the tax-free percentage by the full amount of IRA distributions throughout the year.

Simple example of how income taxes work using the pro-rata rule:

Assume you are age 60 and plan to begin taking distributions from your IRA account. Over the years you made $100,000 in nondeductible IRA contributions. Your traditional IRA was worth $1,000,000 on 12/31 of the prior year.

Tax-free portion of every dollar you withdraw that tax year = $100,000 / $1,000,000 = 10%.

2. Tax Reporting Mistakes

One of the most misunderstood aspects of making non-deductible IRA contributions is the recordkeeping process. The IRS requires the taxpayer to track and report non-deductible contributions. This is a key reason why non-deductible contributions aren’t typically worthwhile as the taxpayer often ends up paying tax twice.

You must tell the IRS you’ve already paid tax on those additions using Form 8606. If you don’t report, track, and file the form, when you take the money out, you’ll pay federal income tax on the same dollar twice. To prove that you’ve already paid tax on nondeductible contributions, you must keep the documentation forever. The IRS doesn’t track your after-tax basis, even when you file the right tax forms.

Once you make non-deductible contributions, you’ll use the same form to take a distribution or make a Roth conversion. The form is necessary as you’ll need to calculate the non-taxable portion of the withdrawal or conversion. The form itself is not especially complex, particularly if you’re working with a CPA. But it can create issues over a long period of time.

What if you’ve previously made non-deductible contributions and forgot to file Form 8606? The good news is this can be an easy problem to fix. From a tax reporting standpoint, you can simply file Form 8606 with your next tax return to reflect historical non-deductible IRA contributions.

3. Capital Gains Tax Rates Versus Regular Income

The only reason to consider making an after-tax contribution to a traditional IRA is tax-deferred growth. If you had invested in a taxable brokerage account instead, you’d have to pay tax on interest, dividends, and capital gains distributions annually, even if you don’t sell any shares.

While you avoid paying tax annually on earnings and growth on after-tax contributions, when you take distributions in retirement, a portion is taxed as ordinary income. In 2026, the highest marginal tax rate is 37%.

However, in a brokerage account, only short-term capital gains and non-qualified dividends are taxed at the higher regular income tax rates. Long-term capital gains and qualified dividends are taxed at much lower rates. In 2026, the rate is between 0% and 20% depending on your regular income bracket. An additional 3.8% federal net investment income tax may apply to certain taxpayers.

Investors should consider whether the additional years of deferred growth are worth a tax rate that could be double down the road.

4. State Tax, Inherited IRAs, RMDs

State Tax Laws

The focus of this article is on the federal income tax, but it’s important to remember some states have their own rules. Massachusetts, for example, does not follow the federal rules on tax-deductible contributions or recovering ‘basis’ on distributions. In the Commonwealth, all IRA contributions are considered after-tax. So your tax basis will be different federally and in Massachusetts when you begin withdrawals, if you haven’t moved. The taxpayer and their CPA must track this.

Tracking for Inherited IRAs

Your beneficiaries not only must know you’ve made non-deductible IRA contributions, they also need the records to prove it. Otherwise, the money will be taxed twice.

Required Minimum Distributions

When you make nondeductible contributions to an IRA, a certain percentage of your RMD is tax-free. However, if you made after-tax and pre-tax contributions, your overall pool of assets subject to RMDs increases. Particularly for wealthy retirees, annual RMDs often exceed cash needs. This can push individuals into a higher marginal tax bracket and cause other tax-related issues, like higher Medicare premiums.

5. Brokerage Account Versus After-Tax IRA? Other Account Options

Brokerage account

As explained above, a taxable brokerage account is a completely flexible way to invest for any goal. There are no contribution limits, withdrawal rules, mandatory distributions…or tax benefits (except at death – called the step-up in basis). There’s also no forever recordkeeping requirements or penalties if you need the money before retirement.

Roth IRA or Roth 401(k)

A Roth IRA is funded with after-tax dollars, just like a non-deducible contribution. But not everyone can contribute, so if your income is too high to make a regular Roth IRA contribution, this won’t be an option. See 2026 limits. There are no income limits for Roth 401(k) contributions, but again, consider your expected future tax rate, current tax situation, and need for liquidity before age 59 1/2.

Roth Conversion

With a Roth conversion, pre-tax IRA funds are taxed, which converts the money into after-tax Roth dollars. Again, the pro rata rule applies, so it’s often best to consider a Roth conversion when rolling over an old 401(k). There are no income limits on Roth conversions.

Backdoor and Mega Backdoor Roth

In a backdoor Roth, investors make a non-deductible contribution to a traditional IRA and then quickly convert to a Roth IRA. Once the money is in a Roth IRA, it’s tax-free when taken out (if you meet the holding period and age requirements). This strategy only works if you don’t have any other traditional IRAs. Otherwise, the pro rata rule applies.

In a mega backdoor Roth, you max out individual additions to your 401(k) then make after-tax (non-Roth) contributions up to the annual maximum (combined employee and employer). You then elect an in-plan Roth 401(k) rollover or roll the after-tax contributions into a Roth IRA.

Not all employer plans allow this and there are other considerations to keep in mind before implementing this or any of the other strategies in this article.

Fixing Nondeductible IRA Contributions with a Reverse Rollover

If allowable by an employer retirement plan like a 401(k), a reverse rollover enables current employees to transfer pre-tax contributions from an IRA to a 401(k) or other type of employer plan. Only pre-tax contributions and earnings are eligible.

By allowing pre-tax money and investment growth to roll into a 401(k), and not nondeductible contributions, in completing a reverse rollover the remaining IRA balance (all basis) can be converted to a Roth IRA tax-free. If you haven’t already done so, you’ll need to tally all prior non-deductible IRA contributions and file the IRS Form 8606—you’ll need to do this step to avoid paying tax twice on your after-tax non-Roth additions.

Example:

Drake has a traditional IRA with a current value of $80,000, which consists of:

• $30,000 in non-deductible contributions
• $50,000 in pre-tax (deductible) contributions and investment earnings

If Drake’s employer 401(k) plan allows reverse rollovers, he could transfer $50,000 to his current 401(k). To complete the cleanup, he can convert $30,000 to a Roth IRA. Both moves would be tax-free!

My Forbes has more on the pros and cons of doing a reverse rollover.

Are Nondeductible IRA Contributions Worth It?

Due to the ongoing recordkeeping and tax reporting requirements, pro rata rule, and other complexities, other investment options are usually more advantageous than the marginal tax benefit of after-tax IRA savings.

Keep in mind the relatively low contribution limit and other tax diversification options. Also consider the tax treatment of your whole pool of retirement savings. Taxes should be a factor, but not the driver, when making financial decisions. Consult your tax advisor and financial advisor to discuss your situation.

 

FAQ: Nondeductible IRA

[Last reviewed November 2026]