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Finding Answers to Internal Revenue Code Restrictions

I give a lot of advice regarding how important Roth IRAs can be because they allow you to pay your taxes now, and if handled correctly, all of the growth on the money can be taken out tax-free at retirement. Similarly, I always advise investors to take advantage of a company-sponsored IRA if there is company-matching. But these types of investments have restrictions and limits, leaving some investors to think they have few alternatives if they hit their limit or don’t qualify. 

Investors who have maxed out their company-sponsored plan but are still looking to save more money often don’t know where to look. The same can be true for Americans whose are restricted from contributing to a Roth because their single (or joint) income has passed a certain threshold set up by the Internal Revenue Code (IRC).

In these and other situations, a non-deductible IRA may be the answer.

The Internal Revenue Code (IRC) states that you are eligible to contribute to an IRA, regardless of how much money you make, so long as you follow some specific guidelines. Starting in 2013, individuals under the age of 50 can invest $5,500 per year, and those over 50 can invest $6,500 (after taking advantage of a catch up contribution of an extra $1,000) in any IRA

But all this is on a non-deductible basis. 

This means you can't write off the contribution on your taxes in the year you contribute. However, a non-deductible Roth IRA can still grow on a tax-deferred basis. This means that in your retirement years, the non-deductible contributions can be returned to you, pro-rata, tax free. 

Now this may not seem like a lot of money to some people, and some may dismiss it as being too small to worry about. However, if you consider a married couple each contributing the max every year from the time they are 50 until age 65, they can save $195,000 (not counting interest). 

If that same investment experienced a rate of return of 7% that $195,000 would grow to nearly $350,000 by age 65. (An assumed growth rate of 7% is provided for illustrative purposes only and may not be indicative of future results as past performance is not a guarantee of future results). 

The non-deductible IRA shows how small changes to your retirement planning can sometimes make significant differences in the years ahead. Sometimes all it takes is being willing to look beyond the normal everyday planning, and some sound advice. It makes sense to review your plan at least annually, if not more often, to take advantage of these opportunities.