There’s a right way and a wrong way to make a nondeductible contribution to a traditional IRA.
For instance, since you’ve already paid income taxes on this money, you can generally convert it to a Roth IRA where earnings grow tax-free. It’s best to do this right away so that your investment doesn’t accrue gains in the meantime.
This strategy, known as a “backdoor Roth conversion,” may make sense if your tax rate is lower than what you expect it to be in the future.
Singles with a modified adjusted gross income of at least $135,000 ($189,000 if married and filing jointly) cannot contribute to a Roth directly, so they may find this strategy valuable.
Be aware that the Tax Cuts and Jobs Act has made Roth conversions somewhat riskier: You can’t reverse a conversion you make in 2018 and savers who made a Roth IRA conversion in 2017 have until Oct. 15, 2018 to undo it.
Also, if you have multiple IRAs, a backdoor Roth could come with a nasty tax bite. In this case, the IRS assesses the tax based on the combined balances of your all IRAs and not just the amount that you’re converting.
If you still want to hold nondeductible IRA contributions without converting them immediately, you should keep that cash separate from any IRAs that have pretax contributions, said O’Mara.
“That keeps the account purely nondeductible, but you do have to track your contributions and your basis in that account,” she said.