Although you don’t qualify for tax deductions, you may still stuff money into your traditional IRA each year. After all, the IRA still provides tax-deferred earnings, while the part of any distribution representing nondeductible contributions is tax-free.
Strategy: Stop it and switch to a Roth. Roth IRAs provide a clear-cut edge over nondeductible traditional IRAs. The only reason to keep contributing to the nondeductible IRA is if you don’t qualify for a Roth.
Know that the tax law phases out the deduction for IRA contributions if you’re an active participant in an employer plan and your modified adjusted gross income (MAGI) is between $60,000 and $70,000 in 2014. The phaseout range is between $96,000 and $116,000 of MAGI for married joint-filing couples. If you’re not an active participant, but your spouse is, it’s between $181,000 and $191,000.
If you’re getting little or no tax benefit from traditional IRA contributions, you might as well contribute to a Roth instead. With a Roth, qualified distributions after five years are 100% tax-free as long as you are age 59½ or older. Plus, you’re not subject to the rules for lifetime mandatory distributions, like you are with a traditional IRA. Thus, the choice of the Roth is often a no-brainer.
Tip: For 2014, the ability to contribute to a Roth IRA phases out between $114,000 and $129,000 of MAGI for single filers; $181,000 and $191,000 for married joint-filing couples.