What Is a Non-Deductible IRA? How It Works & Who It’s For

You might already be familiar with Traditional and Roth IRAs. One offers a tax break up front. The other gives you tax-free withdrawals in retirement. But there’s a lesser-known option that sits between the two: the non-deductible IRA.

It is not a different type of IRA, but rather a different tax treatment for your contributions when you earn too much to deduct them. Even though you do not get an upfront tax break, your investments can still grow tax-deferred — and it could open the door to other strategies like the Backdoor Roth.

Read on for a clear breakdown of how non-deductible IRAs work, when they might be useful, and what tax rules to watch out for. 

What Is a Non-Deductible IRA? 

A non-deductible IRA is not a separate account type. It is simply a Traditional IRA funded with post-tax dollars. You do not receive a deduction when you make contributions. However, your investments can potentially grow tax-deferred, and you will not owe tax on your original contributions when you withdraw them in retirement.

Here is how it works:

✅ Contributions are made with after-tax income.

You do not get a tax break today, but the IRS still allows you to make the contribution.

✅ Earnings are taxed later.

When you withdraw from the account, only the earnings portion is taxed as ordinary income. You already paid tax on your contributions, so that part is tax-free.

✅ Form 8606 tracks your “basis.”

Your basis refers to the total after-tax contributions in your Traditional IRA. This is important because the IRS uses pro-rata rules to determine what portion of a withdrawal is taxable. You cannot simply withdraw only your after-tax contributions.

📝 Note: The pro-rata rule applies across all your Traditional IRAs, not just one account. If you have multiple IRAs with both pre-tax and after-tax funds, the IRS combines them when calculating how much tax you owe on a withdrawal.

✅ Tax-deferred growth.

Even though you do not get a deduction up front, your investments may still grow over time without annual taxes eating into your returns.

So why would anyone choose this?

Sometimes your income is too high to qualify for a Roth IRA or to deduct Traditional IRA contributions. Instead of skipping the IRA altogether, contributing after-tax dollars through a non-deductible IRA can still be a strategic move—especially if you plan to convert those funds to a Roth later.

📌 Also read: The 9 Different Types of IRAs Compared

Why Contribute to a Non-Deductible IRA?

Not everyone qualifies for Roth IRA contributions or deductible Traditional IRA contributions. If your income is too high, but you still want to set aside money in a tax-advantaged retirement account, a non-deductible IRA might be your only remaining option.

✅ No income limit to contribute.

Anyone with earned income can contribute to a Traditional IRA. But the deductibility of those contributions depends on your income and whether you (or your spouse) are covered by a workplace retirement plan.

✅ Still offers tax-deferred growth.

Even though you do not get an upfront tax break, your investments can still grow without being taxed annually. You will only owe tax on the earnings when you take withdrawals in retirement.

✅ Can be a step toward a Backdoor Roth.

Many high earners use non-deductible IRAs as the first step in a Backdoor Roth IRA strategy, which involves converting after-tax funds into a Roth IRA. That lets them enjoy future tax-free withdrawals.

✅ Contributions are withdrawn tax-free.

You already paid tax on your contributions, so that portion will not be taxed again when withdrawn. However, your earnings are taxed as ordinary income.

📝 Reminder: You must file IRS Form 8606 each year you make a non-deductible IRA contribution. This form tracks your basis (after-tax contributions) so the IRS knows which part of your withdrawal should not be taxed.

What Is the Contribution Limit of a Non-Deductible IRA?

The 2025 IRA contribution limit is:

✅ $7,000 if you are under age 50
✅ $8,000 if you are age 50 or older (includes the $1,000 catch-up)

This limit applies to all of your IRAs combined, not just one account. That means your total contributions across Traditional, Roth, and non-deductible IRAs cannot exceed the annual limit.

✏️ Hypothetical Example:

If you contribute $3,500 to a Roth IRA, you can only contribute up to $3,500 more to a Traditional IRA, whether or not that contribution is deductible.

2025 Income Limits for Roth and Traditional IRAs

Roth IRA income phase-out ranges (2025):

Traditional IRA deduction limits (2025):

If you’re not covered by a plan at work, you can generally deduct the full amount unless your spouse is covered and your income exceeds certain limits.

📝 Keep in mind: You need enough income to support the full contribution. This is usually based on net income (sole props), net adjusted income (S corps), or gross income after SE deductions (partnerships).

How to Calculate MAGI for IRA Purposes

MAGI, or modified adjusted gross income, starts with your AGI and then adds back certain items depending on the type of IRA rule you’re applying for.

Common add-backs include:

✅ Student loan interest
✅ Tuition and fees (when applicable)
✅ Foreign income exclusions
✅ Tax-exempt bond interest
✅ Adoption assistance from your employer
✅ Rental or passive loss limitations

📝 Quick tip: MAGI rules differ slightly for Roth eligibility vs. Traditional IRA deductibility. Always check the IRS instructions for the correct version based on your situation.

Rules and Characteristics of a Non-Deductible IRA

1. Contributions Are Made With Post-Tax Income

You fund a non-deductible IRA using money you’ve already paid taxes on. Unlike a deductible Traditional IRA, you do not receive a tax deduction for contributing.

📝 Note: This only applies to the contribution. The growth inside the account is still tax-deferred, and you’ll report the non-deductible amount on IRS Form 8606 each year you contribute.

2. Withdrawals Are Partially Taxed

Distributions from a non-deductible IRA include both taxable and nontaxable portions. Here’s how it works:

✏️ Hypothetical Example:

If 30% of your IRA balance is after-tax contributions, then 30% of each withdrawal is tax-free, and 70% is taxable. You cannot choose to withdraw only the after-tax portion.

3. Tax-Deferred Growth on Investments

Like other IRAs, your investments inside a non-deductible IRA can grow without being taxed each year. You only pay taxes when you take distributions. That includes interest, dividends, and capital gains earned within the account.

4. No Income Limits for Eligibility

Unlike Roth IRAs (which restrict high earners) or deductible Traditional IRAs, a non-deductible IRA has no income cap. Anyone with earned income can contribute, regardless of how much they make.

📝 Reminder: The contribution limit still applies across all IRA types. You are not allowed to exceed the combined IRA limit just because one portion is non-deductible.

When Can You Withdraw From a Non-Deductible IRA?

You can begin taking qualified distributions from a non-deductible IRA once you reach age 59½. At that point, your withdrawals are handled as follows:

✅ Contributions (basis): Withdrawn tax-free, because you’ve already paid taxes on that money
✅ Earnings: Taxed as ordinary income when withdrawn

However, if you take money out before age 59½, you will generally face:

❌ A 10% early withdrawal penalty
❌ Income taxes on the earnings portion of your distribution

📝 Note: The IRS does not let you withdraw only your after-tax contributions. Withdrawals are split between taxable and nontaxable amounts under the pro-rata rule, which applies to all your Traditional IRAs combined.

Do Non-Deductible IRAs Have Required Minimum Distributions (RMDs)?

Yes. Like any Traditional IRA, a non-deductible IRA is subject to required minimum distributions (RMDs). Starting at age 73, you must begin withdrawing a minimum amount each year.

✅ RMD amounts are based on your age and account balance
✅ You can use the IRS life expectancy tables to calculate the required amount
✅ If you do not take your RMD, you could face a 25% penalty on the amount you should have withdrawn

Unlike Roth IRAs, which do not have RMDs during your lifetime, non-deductible IRAs follow the same withdrawal rules as Traditional IRAs even though part of your account is post-tax.

📝 Reminder: The tax portion of each RMD will be calculated using Form 8606, based on your after-tax basis and overall IRA balances.

Traditional IRA vs. Non-Deductible IRA

The main benefit of a Traditional IRA is the upfront tax deduction. 

✏️ Hypothetical Example:

Suppose you earn $30,000 and contribute $5,000 to a Traditional IRA. If you’re eligible for a full deduction, your taxable income drops to $25,000.

But there’s a catch. If you are covered by a retirement plan at work and your modified adjusted gross income (MAGI) is over $89,000 (single/head of household, 2025), you cannot deduct your contribution. You are still allowed to contribute, but you will not receive the tax break.

📝 Note: If you’re not covered by a workplace plan, you can usually deduct the full amount regardless of income. However, different limits apply if your spouse is covered.

When you no longer qualify for the deduction, your Traditional IRA is essentially functioning the same way as a non-deductible IRA, except the tax treatment on withdrawals is slightly different.

Here’s how they compare:

Feature	Traditional IRA (deductible)	Non-Deductible IRA
Contribution Type	Pre-tax	Post-tax
Upfront Tax Deduction	✅ Yes (if income qualifies)	❌ No
Tax on Growth	Deferred	Deferred
Tax on Withdrawals	100% taxable as ordinary income	Only earnings are taxable
Subject to RMDs	✅ Yes	✅ Yes
Income Limits for Contributions	❌ None	❌ None
Income Limits for Deduction	✅ Yes (if covered by a plan)	N/A

In short, a non-deductible IRA may be worth considering if:

✅ You are not eligible for Roth IRA contributions.
✅ You cannot deduct Traditional IRA contributions.
✅ You still want the benefit of tax-deferred growth.

Converting a Non-Deductible IRA to a Roth IRA

Many high earners use a non-deductible IRA as a stepping stone to access Roth IRA benefits. This strategy is often referred to as a Backdoor Roth IRA, and it works because Roth income limits apply only to contributions — not rollovers.

If your MAGI exceeds the phase-out ranges, you cannot make a direct Roth IRA contribution. But there’s a workaround.

Here’s how the Backdoor Roth strategy typically works:

✅ You make a non-deductible contribution to a Traditional IRA.
✅ Then you convert the funds into a Roth IRA — usually right away, before any earnings accumulate
✅ The Roth IRA treats the rollover as a conversion, not a contribution, so income limits do not apply

📝 Note: A non-deductible IRA has no income limits, so this strategy remains available regardless of how much you earn.

Tax Considerations for the Rollover

If you only convert the after-tax contribution amount from your non-deductible IRA (and you have no other Traditional IRA balances), the conversion may be tax-free. That’s because you already paid taxes on the contribution.

However, in most cases, it is not that simple.

The IRS applies the pro-rata rule to all Traditional IRAs you own, including SEP and SIMPLE IRAs. That means:

❌ You cannot choose to convert “just” your after-tax contributions.
✅ The IRS treats the conversion as a proportionate mix of pre-tax and post-tax dollars
✅ Any pre-tax portion of the conversion is taxable in the year of the conversion

✏️ Hypothetical Example:

If you have $20,000 across all Traditional IRAs, and $5,000 of that is after-tax contributions, then 25% of any rollover is tax-free. The remaining 75% is taxable as ordinary income.

📝 Before doing a Backdoor Roth conversion:

It’s a good idea to review your IRA balances or speak with a qualified tax advisor. You are responsible for calculating and reporting the tax impact, and any errors could result in unexpected tax bills or penalties.

📌 Also read: Benefits & Tax Advantages of a Roth IRA

Wrapping It Up

A non-deductible IRA is not always the first choice, but it can still play a useful role especially if your income is too high for other IRA benefits. It gives you a way to keep saving for retirement with tax-deferred growth, even without an upfront deduction.

It also opens the door to strategies like the Backdoor Roth, which can help you manage taxes in the long run. Just keep in mind that rules around withdrawals, pro-rata taxes, and reporting still apply. Knowing how it all works can help you avoid surprises later and make more informed choices about where to put your retirement dollars.

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