Planning for retirement can be overwhelming with the number of savings options available. Two popular types of Individual Retirement Accounts (IRAs) that often create confusion are the Roth IRA and the nondeductible traditional IRA. While both accounts allow after-tax contributions, they have very different tax implications and rules regarding withdrawals, income limits, and growth potential. Understanding how a Roth IRA differs from a nondeductible IRA is essential for making a smart decision that aligns with your long-term financial goals.
What Is a Roth IRA?
Key Characteristics
A Roth IRA is a retirement account funded with after-tax dollars. Contributions are not tax-deductible, but the real advantage lies in how the money grows and is withdrawn. Once funds are in the Roth IRA, they grow tax-free, and qualified withdrawals in retirement are also tax-free. This structure makes it a powerful tool for those expecting to be in a higher tax bracket in the future.
Eligibility Requirements
Not everyone can contribute directly to a Roth IRA due to income limits. For 2025, individuals earning more than a certain threshold may be partially or fully ineligible to contribute directly:
- Single filers: Contribution limit begins to phase out at $146,000 and is completely phased out at $161,000.
- Married filing jointly: Phase-out starts at $230,000 and ends at $240,000.
If you fall within these limits, the Roth IRA can be an excellent choice for long-term savings. If not, alternative strategies like a backdoor Roth IRA may be necessary.
What Is a Nondeductible IRA?
Core Features
A nondeductible IRA is a type of traditional IRA where contributions are made with after-tax income but are not eligible for a tax deduction. The main reason to open a nondeductible IRA is to take advantage of tax-deferred growth. Earnings grow tax-deferred, but you will owe taxes on the investment gains when you withdraw the funds in retirement.
This account type is often used by high-income earners who are ineligible for both deductible IRAs and direct Roth IRAs. It’s commonly used in combination with the backdoor Roth IRA strategy.
Contribution Limits
Both Roth IRAs and nondeductible IRAs share the same annual contribution limits:
- Under age 50: $7,000 in 2025
- Age 50 and above: $8,000 (includes a $1,000 catch-up contribution)
These limits apply across all IRAs combined, not per account type.
Key Differences Between Roth IRA and Nondeductible IRA
1. Tax Treatment of Withdrawals
- Roth IRA: Qualified withdrawals (age 59½ and account held for 5 years) are tax-free.
- Nondeductible IRA: Contributions are not taxed again, but investment earnings are taxed as ordinary income upon withdrawal.
2. Required Minimum Distributions (RMDs)
- Roth IRA: No RMDs during the account holder’s lifetime.
- Nondeductible IRA: Subject to RMDs starting at age 73.
This makes the Roth IRA more attractive for estate planning, allowing assets to continue growing tax-free for heirs.
3. Growth Potential
Since Roth IRA withdrawals are tax-free, all growth remains untouched by the IRS in retirement. Nondeductible IRAs grow tax-deferred, but only the contributions are tax-free; the growth is taxed. Over time, this can make a significant difference in your total after-tax retirement income.
4. Income Eligibility
- Roth IRA: Income limits apply, restricting high earners from contributing directly.
- Nondeductible IRA: No income limits for contributions.
This is one of the main reasons nondeductible IRAs exist: to offer a way for high-income individuals to save for retirement within an IRA structure.
Backdoor Roth IRA: Connecting the Two
A Strategic Approach
For those ineligible to contribute directly to a Roth IRA due to income limits, a backdoor Roth IRA strategy may be used. Here’s how it works:
- Contribute to a nondeductible traditional IRA.
- Convert the funds to a Roth IRA (usually shortly after).
This method effectively bypasses the income limits. However, it is important to be aware of the IRS pro-rata rule, which could create a tax burden if you already have other traditional IRAs with pre-tax funds.
When to Choose a Roth IRA
Consider a Roth IRA if:
- You qualify based on income limits.
- You anticipate being in a higher tax bracket during retirement.
- You want tax-free growth and withdrawals.
- You prefer not to take RMDs in retirement.
The Roth IRA is especially valuable for younger workers and those planning for a long investment horizon, as it allows maximum benefit from tax-free compound growth.
When to Choose a Nondeductible IRA
Consider a nondeductible IRA if:
- Your income is too high for a Roth IRA or a deductible traditional IRA.
- You want to use the backdoor Roth IRA method.
- You want to contribute more to tax-advantaged retirement savings beyond your 401(k).
While not as advantageous as a Roth IRA on its own, the nondeductible IRA is still a useful vehicle for tax-deferred investment growth, especially when paired with a conversion strategy.
Common Mistakes to Avoid
1. Failing to Track Contributions
Always file IRS Form 8606 when making nondeductible contributions. This keeps a clear record of your after-tax contributions so you’re not double-taxed at withdrawal.
2. Ignoring the Pro-Rata Rule
When converting to a Roth IRA, the IRS looks at all traditional IRA funds including deductible contributions and earnings to calculate the tax owed. This can lead to unexpected tax bills if not properly managed.
3. Waiting Too Long to Convert
If using the backdoor Roth method, delay can cause your nondeductible contribution to generate earnings before conversion, which will be taxed. Timely conversion reduces this tax exposure.
Choosing between a Roth IRA and a nondeductible IRA depends heavily on your income level, current tax bracket, and future retirement plans. The Roth IRA provides powerful long-term benefits for tax-free growth and withdrawal, while the nondeductible IRA offers a workaround for high earners who are otherwise locked out of Roth contributions. In many cases, using both accounts strategically especially through a backdoor Roth conversion can maximize retirement savings. Always consider speaking with a financial advisor or tax professional to ensure you’re following the right approach for your unique financial situation.