A Roth IRA will always be as good or better than a traditional non-deductible IRA. In both cases, contributions are made after tax, but all future growth and withdrawals from a Roth IRA are tax-exempt, while the withdrawal from growth of a traditional non-deductible IRA is subject to taxes as income. If you have a non-deductible IRA, you can rollover the funds into a Roth IRA or even into gold. You won't have to pay taxes on your account contributions, but account earnings will be taxable at the time of the Rollover IRA into Gold conversion. If you have deductible and deductible IRAs, you must prorate the taxable and non-taxable portions to determine what part of your conversion is taxable.
When you make contributions to a Roth, you do so with after-tax money. By converting non-deductible IRA contributions to a Roth, you're also converting after-tax money. And once the conversion is complete, any investment growth within the account can be withdrawn as a qualified distribution tax exemption. The Internal Revenue Service (IRS) prohibits anyone earning excessive income from making a deduction for their traditional IRA contribution.
At the same time, income restrictions may prevent direct contributions to the other major type of IRA, the Roth IRA. For many people, especially those with higher incomes, a non-deductible IRA is just a stop on the road to converting those funds into a Roth IRA, using a “clandestine” Roth IRA. People who contribute to a non-deductible IRA usually do so because their incomes are too high to contribute to a Roth IRA or deduct their contributions to a traditional IRA. A traditional deductible IRA is the most common type and is probably what most people consider an IRA.
A clandestine Roth IRA refers to a two-step maneuver that people with high incomes can use to get around the income limits of Roth IRAs. If your IRA savings are comprised entirely of non-deductible IRAs, you can convert them to a Roth IRA relatively easily. However, the rules you'll need to follow will depend on whether you only have non-deductible IRAs or deductible and deductible IRAs. When you make distributions in retirement, you'll pay taxes on investment gains, just like with a standard traditional IRA.
Withdrawals from a Roth IRA are tax-exempt if you've had a Roth account for at least five years and are 59 and a half years old or older or qualify for an exception. You can use a non-deductible IRA to enjoy the growth of a tax-deferred investment if you can't take advantage of the deductibility of a traditional IRA. So the non-deductible IRA gives you the benefit of tax-deferred growth, but so can the Roth IRA, and the Roth IRA also offers other valuable tax and estate planning benefits. First, they contribute to a traditional IRA (which has no income limits) and then convert that IRA into a Roth one.
The good news for workers is that regardless of their earned income, they can always contribute to a non-deductible IRA and receive tax-deferred growth, even though they won't be able to contribute pre-tax funds. However, most commonly, higher-income workers access financial advisors' favorite retirement account, the Roth IRA.
