Contribute to non-deductible IRA or something else?

Question

I already have a traditional IRA (rollover from former employer's 401(k)) and my current employer doesn't offer a retirement plan, so I'd been funding a Roth IRA up to the maximum allowed each year since I began with them over five years ago. I've not made any contributions to the rollover IRA since then, I've just been letting it earn dividends.

This tax year though (2019) I'm not eligible to make the full contribution amount, so I corrected it by removing the excess + earnings and adding it back as a contribution for the current tax year (2020). I've also lower my automatic contribution from my bank account so that 2020 will have roughly the amount allowed last year, to reduce the excess.

I'm now trying to figure out what to do with the money I would have put into the Roth this year. I read that its possible to make non-deductible contributions to a traditional IRA, but it also seems that this might be limited due to my income as well; or perhaps I'm only disallowed from making deductible contributions, I'm not clear on this point.

I didn't think it'd be relevant, but my wife does have, I believe, a 403(b) plan from her employer, and I don't believe she contributes to it.

Would it be allowed to make non-deductible contributions to a traditional IRA (not my rollover IRA), and what would be the maximum allowed? If that's not possible, what would be the next best investment option? I have no other investments currently except the IRAs.

Answer 1

Determining how much you can contribute and/or deduct when dealing with an IRA or Roth IRA can be confusing, but looking at the IRS website and the information in your question it can be worked out.

From your question:

• This tax year though (2019) I'm not eligible to make the full [Roth] contribution amount.
• My current employer doesn't offer a retirement plan.
• I'm now trying to figure out what to do with the money I would have put into the Roth this year.

I am making the assumption that the statement of no retirement plan with the current employer was true for all of 2019, meaning you didn't change employers. I am also assuming that you are single, or if married your spouse also isn't covered by a retirement plan.

Looking at the IRS information on IRA Deduction Limits:

Traditional IRAs

• Retirement plan at work: Your deduction may be limited if you (or your spouse, if you are married) are covered by a retirement plan at work and your income exceeds certain levels.
• No retirement plan at work: Your deduction is allowed in full if you (and your spouse, if you are married) aren’t covered by a retirement plan at work.

It appears that you fall into the second group. Which means that for 2019, you can make a deductible contribution to a regular IRA. The maximum amount of the contribution will be either:

• $6,000 minus your 2019 Roth contribution
• $7,000 minus your 2019 Roth contribution, if you're age 50 or older.

Update: Additional information was added to the question.

I didn't think it'd be relevant, but my wife does have, I believe, a 403(b) plan from her employer, and I don't believe she contributes to it.

This is very important information. That moves the question to group 1 of the IRS quoted material. Now this part is applicable:

2019 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are NOT Covered by a Retirement Plan at Work

Filing Status married filing jointly with a spouse who is covered by a plan at work

Your Modified AGI Is
- Your Modified AGI is $193,000 or less... Then You Can Take a full deduction up to the amount of your contribution limit.
- Your Modified AGI More than $193,000 but less than $203,000... Then You Can Take a partial deduction.
- Your Modified AGI is $203,000 or more ... no deduction.

To figure out your contribution limit, you have to use the formula at this link: Amount of Roth IRA Contributions That You Can Make For 2019.

Now you have to decide if the presence of the existing Traditional IRA makes it too complex to do a back door Roth conversion with the non-deductible part.