How can I calculate non deductible traditional IRA?

To calculate your non-deductible Traditional IRA contribution, you must determine the difference between your total contribution and the deductible amount allowed based on your income and workplace retirement plan coverage.

The calculation is reported on Form 8606. This form establishes your "basis" (after-tax money) in the IRA, preventing you from being taxed twice when you eventually withdraw the funds.

1. Introduction

A non-deductible Traditional IRA contribution occurs when you contribute to a Traditional IRA but cannot deduct the amount from your taxes because your modified adjusted gross income (MAGI) exceeds IRS limits and you (or your spouse) are covered by a retirement plan at work (like a 401(k)).

The calculation matters because:

• Tax-Free Growth: Earnings still grow tax-deferred.
• Double Taxation Prevention: Filing Form 8606 tracks these after-tax dollars so they aren't taxed again upon withdrawal.
• Backdoor Roth Strategy: This is the first step in the "Backdoor Roth IRA" strategy (contributing non-deductible funds and immediately converting them to Roth).

2. Core Explanation

Step 1: Determine Your Contribution Limit

For both 2025 and 2026, the maximum you can contribute to all your Traditional and Roth IRAs combined is:

• Under age 50: $7,000
• Age 50 or older: $8,000

Step 2: Check Deductibility (The "Phase-Out" Zones)

If you (or your spouse) have a workplace retirement plan, your ability to deduct the contribution phases out as your income rises. If your income is above the range, your contribution is 100% non-deductible.

2025 Phase-Out Ranges (MAGI)

• Single / Head of Household: 79,000 – 89,000
• Married Filing Jointly (You are covered): 126,000 – 146,000
• Married Filing Jointly (Spouse covered, you are not): 236,000 – 246,000
• Married Filing Separately: 0 – 10,000

2026 Phase-Out Ranges (MAGI)

• Single / Head of Household: 81,000 – 91,000
• Married Filing Jointly (You are covered): 129,000 – 149,000
• Married Filing Jointly (Spouse covered, you are not): 242,000 – 252,000
• Married Filing Separately: 0 – 10,000

Note: If neither you nor your spouse is covered by a workplace plan, your contribution is fully deductible regardless of income.

Step 3: Calculate the Non-Deductible Amount

The formula is simple: \text{Non-Deductible Amount} = \text{Total Contribution} - \text{Deductible Amount}

• Scenario A (Income Above Limit): If your MAGI is above the top number in your range (e.g., >89,000 for Single in 2025), your deduction is 0.
  • Calculation: 7,000 (Contribution) - 0 (Deductible) = $7,000 Non-Deductible.
• Scenario B (Income In Phase-Out): If your income falls inside the range, you get a partial deduction.
  • Example: You are Single in 2025 with MAGI of 84,000 (exactly halfway through the 79k–$89k range).
  • You can deduct 50%.
  • Calculation: 7,000 Total - 3,500 Deductible = $3,500 Non-Deductible.

Step 4: File Form 8606

You must file Form 8606 with your tax return (Form 1040) to report this.

• Line 1: Enter your non-deductible contribution amount.
• Line 2: Enter your total basis from previous years (from Line 14 of your last Form 8606).
• Line 3: Add them together to establish your new total basis.

---

3. Audit and Practitioner Considerations

When dealing with non-deductible IRAs, the IRS frequently scrutinizes "basis" tracking and distribution rules.

1. The "Cream in the Coffee" (Pro-Rata) Rule:

   • Challenge: Taxpayers often assume they can withdraw only their non-deductible (tax-free) contributions first.
   • Reality: The IRS views all your Traditional IRAs (including SEPs and SIMPLEs) as one single account. You cannot separate the "cream" (non-deductible basis) from the "coffee" (pre-tax dollars).
   • Risk: If you convert or withdraw funds, the tax-free portion is determined strictly by the ratio of Total Basis / Total IRA Balance. If you have large pre-tax Rollover IRAs, a "Backdoor Roth" conversion will be mostly taxable.

2. Missing Form 8606:

   • Challenge: Failing to file Form 8606 for every year you make a non-deductible contribution.
   • Consequence: The IRS assumes your basis is zero. When you eventually withdraw the money, you will pay tax on it again unless you can reconstruct your history and file late forms (which carry a $50 penalty per form).

3. Active Participant Status:

   • Assumption: "I didn't contribute to my 401(k), so I'm not covered."
   • Reality: If your employer made a non-elective contribution (like a profit-sharing deposit) or if you are simply eligible for a defined benefit pension, your W-2 Box 13 "Retirement Plan" box will be checked. This triggers the income limits.

4. Recharacterization vs. Excess:

   • Documentation: Ensure you clearly distinguish between a recharacterization (changing a Roth contribution to Traditional) and a new non-deductible contribution. They are reported differently.

---

4. Summary

• Who: Taxpayers covered by a work plan with income exceeding the phase-out limits (89k Single / 146k MFJ for 2025).
• What: The portion of your IRA contribution you cannot deduct.
• How: Report on Form 8606, Line 1.
• Key Limits:
  • 2025: Limit 7,000 (8,000 if 50+).
  • 2026: Limit 7,000 (8,000 if 50+).
• Critical Rule: Keep your Form 8606 forever. It is the only proof that you have already paid tax on this money.

5. Suggested Next Steps

• Check W-2 Box 13: Confirm if the "Retirement Plan" box is checked for you or your spouse to verify if limits apply.
• Retrieve Prior Forms: Locate your most recent Form 8606 to see if you have existing basis on Line 14.
• Consider Backdoor Roth: If you have no other Traditional IRA balances, ask a professional about converting this non-deductible contribution to a Roth IRA immediately to avoid tax on future growth.
• Download 2025 Forms: Review the draft instructions for Form 8606 to prepare for filing.