I hate to admit it, but I'm still confused about IRAs. As mentioned previously, my husband and I make quite a bit of money ($225,000 total a year), which puts us over the MAGI limits for contributing to a Roth IRA and for tax deductions on a traditional IRA. I had assumed that meant that I couldn't contribute to either without doing some of the back door Roth conversion stuff that was mentioned (which is probably very useful, but may be a little bit beyond my abilities at this stage).
So, for clarity's sake, can I contribute to a traditional IRA with post-tax money, and then somehow not claim a tax deduction for it? If so, does it need to a special kind of IRA? That would allow the growth to be tax-deferred , right?
For example, I have a (very small, ~$4,000) IRA that's a roll-over IRA from a previous 401k plan. Can I use post-tax money to contribute to that account? Even if it's possible, would it be wise to do so given that it would mean mixing up post-tax and pre-tax contributions? Should I open a different IRA that's just for post-tax money?
Hi there - to try and clarify and directly answer your questions:
Yes, you can contribute to the "rollover" IRA with your post-tax traditional IRA contribution for 2017. That is considered a traditional IRA. You do not need to open another traditional IRA.
And yes, that money would grow tax deferred and so you don't have to worry about the capital gains, etc... as you would if you just put that money in a taxable account.
Either your tax software or accountant will know that there is no deduction associated with your contribution.
To follow up on the next part - As a fellow high earner, please do the research on the "backdoor Roth". My wife and I have been doing this for years and it is not complicated (or as complicated as it might seem).
The only even slightly complicated part is rolling over your current traditional IRA, which contains the 4k right now, into a new Roth IRA account, preferably at the same firm where you have your current account (we use Fidelity). You will pay taxes on that - perhaps $1k or so this year.
Then at that point you will have an open, but empty traditional IRA and a Roth IRA with a 4k balance. From then on you will deposit your post-tax traditional IRA money into the open, empty traditional IRA - I do this as soon as possible in January. As soon as that posts to the account (a few days or so), you go online and transfer the money from the traditional IRA to the Roth IRA. There is no tax consequence since you already are putting in post-tax money. It is really easy.
Now that money not only grows tax-deferred, but is also completely income tax free at the time of withdrawal in the future, amongst other estate planning benefits in the future.
I hope this helps! The small amount of extra time to do this is totally worth it, in my opinion, for a high earner who is young (I am assuming you are young?) and already maxing out other 401k accounts.