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I am setting up a Traditional IRA account and this will have my post tax contributions. Traditional IRA does not have any income limit but the contribution limit is $6000 (married filling jointly).

If the same funds are available as a normal mutual funds account (Non-Retirement) then is there any reason to even use a post tax traditional IRA account? A normal mutual funds account also does not have any contribution or income limits.

Ideas?

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    Have you considered converting funds from the Traditional IRA to Roth IRA?
    – user102008
    Commented Nov 2, 2021 at 18:15
  • I thought about it but I will have to pay tax on that now and that will even push me into a different income bracket.
    – Mary Doe
    Commented Nov 2, 2021 at 20:43
  • Unless you have pre-tax funds in Traditional/SEP/SIMPLE IRAs, you will not have to pay tax for conversion to Roth IRA, since you are converting all post-tax funds.
    – user102008
    Commented Nov 2, 2021 at 22:48
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    FYI, the usual terms used to describe IRA contributions are "deductible" and "non-deductible", not "pre-tax" and "post-tax".
    – Barmar
    Commented Nov 3, 2021 at 14:37
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    @MehreenAzam: Does your current 401k allow rollover from IRA? If it does, you can rollover all the pre-tax amounts into your 401k, leaving only post-tax amounts in the Traditional IRA, which will allow you to convert to Roth IRA without paying tax.
    – user102008
    Commented Nov 3, 2021 at 16:09

2 Answers 2

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There are some distinct advantages of putting your first $6K of funds per year into a Non-Deductible IRA, compared to putting that same amount into a normal investment account:

  1. Like both the Traditional and Roth IRAs, taxes are deferred. With a non-retirement account you have to pay taxes each year that you have realized capital gains.
  2. You have the ability to transfer those funds into a Roth IRA, and from that moment on you'll have no taxes due on any of the gains. There is a Pro-Rata rule that dictates how much of the rollover is taxable, but generally if you don't have a lot of funds already in a Traditional IRA, then it usually makes sense to immediately roll funds sitting in a non-deductible IRA over to a Roth. This is oftentimes called a "backdoor Roth" because it enables contributing to a Roth even if you aren't eligible to directly contribute to a Roth.
  3. Under most circumstances IRAs are protected from bankruptcy, up to a limit. Regular investment accounts are not.

The disadvantages of the Non-Deductible IRA compared to a brokerage account are:

  1. There is a 10% penalty on the taxable portion of any withdrawals you make before the age of 59.5.
  2. There is some extra documentation needed for non-deductible contributions (Form 8606.) If somehow you forgot to fill out the form, then later when you withdraw those after-tax contributions they may be subject to taxation again. Additionally, in theory you may have to save those forms for many years until all the money is withdrawn from the account. Though, perhaps if you roll the Non-Deductible IRA funds into a Roth you wouldn't need to continue to keep the records indefinitely, since no part of Roth distributions would normally be taxable in the future.

Weighing these Pros and Cons, if you are going to move the Non-Deductible IRA into the Roth, then it's probably a no-brainer to put your first $6K per year into the after-tax IRA.

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  • Thank you so much! Yes. I would go with Traditional IRA and keep track of Form 8606. I use Turbo Tax so I will need to print it out for each year starting 2022.
    – Mary Doe
    Commented Nov 2, 2021 at 20:42
  • "There may be penalties if you later decide to withdraw more than your contributions (i.e. some of your gains) before the age of 59.5" There are actually taxes and penalties even if you decide to withdraw less than your contributions before the age of 59.5, as long as there are any gains, since any withdrawal from Traditional IRA will withdraw from both pre-tax and post-tax parts.
    – user102008
    Commented Nov 2, 2021 at 22:53
  • @user102008 Agreed- the penalty would apply to some amount (unless the account unfortunately had at most the sum of the non-deductible contributions) . I updated the answer. I left out the mention of taxes though since it's comparing with a non-retirement account, which would also be taxable. Thx!
    – TTT
    Commented Nov 3, 2021 at 5:32
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    @MehreenAzam I'm pretty sure the form is available in Turbo Tax, though it may not always be available immediately in January. Also, I think you have to fill out the form for each person, even if married filling jointly.
    – TTT
    Commented Nov 3, 2021 at 14:16
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    @MehreenAzam Your wife and you have to file individual Forms 8606 both of which will accompany your joint return. That is, you don't declare $12,000 on one form but rather $6000 on two separate Forms 8606. TurboTax knows about this and will create two Forms 8606 for you.
    – Dilip Sarwate
    Commented Nov 3, 2021 at 18:47
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All IRA contributions are "post-tax" money going in. It's whether or not you get a tax deduction in the contribution year. There are income limits for the deduction, depending on your work retirement plan options.

You cannot deduct your taxable income with brokerage account contributions / purchasing of mutual funds (or ETFs, or individual stocks/bonds) in that account.

If you are below the income limits of a Roth IRA and don't want to pay taxes on future gains (as you would with a brokerage account), then you should prefer a Roth IRA over a traditional.

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    I think you may have misunderstood the question. OP is specifically asking about after-tax contributions to a Traditional IRA, which is different from the typical pre-tax contributions you're referring to in your answer. It's generally for people that can't contribute directly to Roth, but also have a retirement plan at work and aren't eligible to take the tax deduction for Traditional IRA contributions.
    – TTT
    Commented Nov 2, 2021 at 20:05
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    @TTT as written, all IRA contributions are made with after tax dollars. It's done with money after your employer takes out medical, federal tax, etc. It's the deduction / tax credit that gets refunded to fill in the gap. The question said nothing about backdoor IRA contributions or income limits
    – OneCricketeer
    Commented Nov 3, 2021 at 12:47
  • I think the point you're making in your first sentence is semantics, and I agree with that. But when talking about retirement plans, the term "after-tax" or "post-tax" has a special meaning, which is, you won't be able to take a deduction for it. That's why your answer doesn't apply to this question. The question assumes OP isn't eligible for either a tax-deductible traditional IRA or a Roth. That's why OP is exploring the lesser known third option.
    – TTT
    Commented Nov 3, 2021 at 14:27
  • There's no effective difference between pre-tax contributions and getting a deduction for after-tax contributions. Either way you don't pay tax on the contribution.
    – Barmar
    Commented Nov 3, 2021 at 14:35
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    Accountants have to watch how the money actually moves through the system, so the distinction matters to them. But to the taxpayer it makes no difference. But you're right, the IRS terminology for IRAs refers to deductible and non-deductible contributions. I pointed it out to the OP in as comment. But the terminology makes no difference regarding the decision whether to fund an IRA.
    – Barmar
    Commented Nov 3, 2021 at 14:56

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