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Posted by Pat Raskob

Demystifying the 8606 Non-Deductible IRA

Demystifying the 8606 Non-Deductible IRA

Individual Retirement Accounts (IRAs) offer tax-advantaged ways to save for retirement, but not all IRAs provide the same tax benefits. One specific type of IRA that often confuses taxpayers is the non-deductible IRA, often associated with IRS Form 8606. 

Understanding Traditional and Roth IRAs

To fully grasp the concept of a non-deductible IRA, it's essential to first understand the fundamental differences between traditional and Roth IRAs:

A. Traditional IRA:

  • Tax Deductibility: Contributions made to a traditional IRA may be tax-deductible if you meet certain eligibility criteria and income limits. This means you can reduce your taxable income for the year in which you contribute.

  • Tax-Deferred Growth: Earnings within a traditional IRA grow tax-deferred, meaning you don't pay taxes on gains until you withdraw funds in retirement.

  • Taxable Distributions: Withdrawals from a traditional IRA in retirement are generally subject to income tax. The tax rate is based on your tax bracket at the time of withdrawal.

B. Roth IRA:

  • Non-Tax Deductible: Roth IRA contributions are made with after-tax dollars, meaning you don't receive a tax deduction for your contributions.

  • Tax-Free Growth: Earnings within a Roth IRA grow tax-free, and qualified withdrawals in retirement are entirely tax-free.

  • No Required Minimum Distributions (RMDs): Roth IRAs do not have mandatory minimum distribution requirements during the account owner's lifetime, allowing for greater flexibility in retirement planning.

Now that we have a foundational understanding of traditional and Roth IRAs let's explore the non-deductible IRA and how it fits into this landscape.

What Is a Non-Deductible IRA?

A non-deductible IRA, also known as a non-deductible traditional IRA, is an individual retirement account where contributions are made with after-tax dollars, similar to a Roth IRA. However, the key distinction lies in the contributions and earnings tax treatment.

Here are the main features of a non-deductible IRA:

  • Contributions Are Not Tax-Deductible: Unlike a traditional IRA, contributions to a non-deductible IRA are not tax-deductible. You fund the account with money on which you have already paid income tax.

  • Tax-Deferred Growth: Similar to a traditional IRA, the earnings and investment gains within a non-deductible IRA grow tax-deferred. This means you do not pay taxes on these gains annually.

  • Tax Treatment of Distributions: When you withdraw funds from a non-deductible IRA, the taxation is pro-rata based on the ratio of deductible and non-deductible contributions to the total account balance. This unique aspect of non-deductible IRAs is where IRS Form 8606 comes into play.

IRS Form 8606: The Non-Deductible IRA Tracker

IRS Form 8606 is a tax form used to report nondeductible contributions to traditional IRAs and to calculate the taxable portion of distributions from these accounts. It is a crucial tool for tracking your non-deductible contributions and ensuring that you pay the correct amount of tax when you withdraw funds.

Here's how IRS Form 8606 works:

A. Reporting Non-Deductible Contributions

  • Initial Filing: When you make non-deductible contributions to a traditional IRA for the first time, you need to file IRS Form 8606 with your tax return for that year. This establishes the basis for your non-deductible contributions.

  • Subsequent Filings: In subsequent years, you do not need to refile Form 8606 when you continue to make non-deductible contributions. Instead, you only report the new contributions on your tax return for that year.

B. Calculating the Taxable Portion of Distributions

  • Distributions: When you take withdrawals from your traditional IRA, whether in retirement or before, a portion of the distribution may be taxable. Form 8606 helps calculate the taxable and non-taxable portions of the distribution.

  • Pro-Rata Rule: The pro-rata rule applies when you have both deductible and non-deductible contributions in your traditional IRA. It calculates the percentage of your distribution that is subject to income tax. The formula is:

(Total Non-Deductible Contributions) / (Total Traditional IRA Balance) = Pro-Rata percentage

Example: Let's say you have $20,000 in non-deductible contributions and $80,000 in deductible contributions and earnings for a total balance of $100,000. If you withdraw $10,000, 20% ($20,000 / $100,000) of the withdrawal is non-taxable, and 80% is taxable.

C. Record-Keeping

Maintaining accurate records of your non-deductible contributions and IRS Form 8606 filings is crucial to avoid double taxation on these funds in retirement.

Benefits of a Non-Deductible IRA

While the concept of contributing after-tax dollars to an IRA may seem less appealing than the immediate tax deduction of a traditional IRA, a non-deductible IRA offers several advantages:

  • Access to Traditional IRA Benefits: If you have a high income that exceeds the eligibility limits for making deductible contributions to a traditional IRA or contributing to a Roth IRA, a non-deductible IRA still allows you to benefit from the tax-deferral of earnings.

  • Asset Protection: In many states, IRAs, including non-deductible IRAs, are protected from creditors to a certain extent. This can provide an additional layer of asset protection.

  • Backdoor Roth IRA Conversion: A non-deductible IRA can serve as a stepping stone to a Roth IRA through a backdoor Roth conversion. This strategy involves converting your non-deductible IRA funds into a Roth IRA, where future earnings can grow tax-free.

  • Tax-Deferred Growth: Similar to traditional IRAs, a non-deductible IRA allows your investments to grow tax-deferred, significantly enhancing your retirement savings over time.

Considerations and Limitations

While a non-deductible IRA can be a valuable tool for retirement savings, there are certain considerations and limitations to be aware of:

  • Contribution Limits: The annual contribution limits for non-deductible IRAs are the same as traditional and Roth IRAs. As of my knowledge, the cutoff date was September 2021; the annual limit was $6,000 for individuals under age 50 and $7,000 for those aged 50 and older.

  • Income Limits: Keep in mind that there are income limits for making contributions to Roth IRAs. If your income exceeds these limits, the backdoor Roth conversion may be the only way to access a Roth IRA.

  • Pro-Rata Rule: The pro-rata rule can complicate the tax treatment of distributions if you have both deductible and non-deductible contributions in your traditional IRAs. It's important to understand how this rule works and how it may affect your tax liability in retirement.

  • Reporting Requirements: Properly reporting your non-deductible contributions on IRS Form 8606 is essential to avoid taxation on these contributions when you withdraw funds. Failure to file or inaccurately filing Form 8606 can result in tax penalties.

  • Roth Conversion Timing: If you plan to use the backdoor Roth IRA conversion strategy, be mindful of the tax implications. Converting a non-deductible IRA to a Roth IRA may trigger tax liability based on the pro-rata rule.


A non-deductible IRA, while lacking the immediate tax benefits of a traditional deductible IRA, plays a crucial role in retirement planning, especially for individuals with higher incomes. It offers the advantage of tax-deferred growth and can serve as a gateway to valuable strategies like the backdoor Roth conversion.

Understanding how a non-deductible IRA works, including the pro-rata rule and the importance of IRS Form 8606, is vital to ensure that you maximize the tax efficiency of your retirement savings. Consulting with a qualified financial advisor or tax professional can help you navigate the complexities of non-deductible IRAs and make informed decisions that align with your long-term financial goals.



Pat Raskob
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