Non-Deductible IRA Contributions are Under Utilized by High Income Earners

High income earners with employer sponsored retirement plans often assume that they are not eligible to make IRA contributions. In fact, workers with employer sponsored plans, and their spouses, are permitted to supplement those accounts with a traditional IRA. Contributions may not be deductible, but earnings still accumulate tax deferred.

(PRWEB) February 1, 2006 -- As they rapidly approach retirement age, many savers find that they need to save more than the maximum annual 401k contribution. Many of these individuals would like to contribute more money to tax deferred investment accounts, but have been told they are ineligible to contribute to an IRA for one of the following reasons:

1. They are an active participant in an employer sponsored retirement plan (pension plan, 401k, SEP, or SIMPLE)

2. Although not covered by an employer plan, a spouse is, and joint income exceeds $160,000.

The good news for savers with a little more money to sock away is that almost any individual is entitled to contribute up to $4000 per year to a traditional IRA. Regardless of income. Regardless of whether or not they are covered by an employer plan.

Of course, with the IRS there is always a catch. You can't take a deduction for your contributions if you are over the specified income limits. Still, you should not dismiss the benefits of tax deferred growth just because you can't take a current year tax deduction for the contribution. A nondeductible IRA contribution still allows your investment earnings to accumulate on a tax deferred basis until distribution.

You will need to file a special form with your tax return if you have made non-deductible IRA contributions. In addition, if you are mixing deductible and non-deductible contributions within a single account, you need to be careful in your record keeping to avoid paying tax twice when you take distributions. However, for most savers the ability to boost their family's tax deferred savings by up to $8000 per year with an individual and spousal IRA contribution is well worth a little paperwork and recordkeeping.

The value of tax-deferred investing varies among individuals depending on, among other things, current tax bracket, years to retirement, and overall financial situation. Generally speaking, the higher your tax bracket and the longer your investment time horizon, the more important tax deferral is to your investment strategy. Speak with your financial planner or tax advisor regarding the possible benefits of making non-deductible IRA contributions. It may be a useful weapon to add to your retirement planning arsenal.

James Kinney is an independent financial planner based in Bridgewater, NJ. His firm specializes in retirement planning for individuals and small business owners.

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