Just as with tax-deductible retirement plan contributions, non-deductible contributions
compound tax-free every year the money remains in your account.
The Tax Reform Act of 1986 reduced or eliminated the tax deduction for higher-earning workers who were covered under a workplace plan, though non-deductible contributions
were still permitted.
However, all the non-Roth IRAs owned by the taxpayer are treated as one IRA for purposes of determining the pro-rata taxable and nontaxable treatment of the converted amount, so an individual cannot simply elect to convert only his or her nondeductible IRA contributions, even if all the individual's non-deductible contributions
are in one IRA.
Individuals who are not eligible to make deductible contributions to a traditional IRA or to make contributions to a Roth IRA still may make non-deductible contributions to a traditional IRA.
Any IRA account, whether it includes tax-deductible or non-deductible contributions, may be converted to a Roth IRA, provided the account holder is eligible.
Except for non-deductible contributions
made to your original IRA, the amount of the conversion is considered income and is taxable in the year you convert.
Do you have non-deductible contributions
in your IRA?
IF a taxpayer has made non-deductible contributions, a portion of the distribution is not subject to taxation or penallty--the portion treated as a return of non-deductible contributions.
The nontaxable amount is based on the ratio of cumulative non-deductible contributions to the total balance of all IRAs.
Of those who funded their IRAs in the 1998 tax year, more than half made a tax-deductible contribution to a tax-deferred Traditional IRA, with the remainder split about evenly between non-deductible contributions
to Traditional IRAs and contributions to the new Roth IRAs.
a) Please note: Investors who have made non-deductible contributions
to a Traditional IRA should have filed IRS Form 8606 with their tax returns to report each year a non-deductible contribution
This new IRA will generally allow non-deductible contributions
to build up and be distributed without payment of any income taxes on any appreciation of IRA investments.