Making a nondeductible IRA contribution through Fidelity can be a useful retirement planning strategy, especially for individuals whose income levels exceed the threshold for deducting traditional IRA contributions or for contributing directly to a Roth IRA. While nondeductible contributions don’t offer an upfront tax deduction, they allow your investments to grow tax-deferred. Fidelity, as a major investment platform, makes it relatively easy to set up and manage such contributions. Understanding the process, rules, and necessary documentation is essential to avoid confusion, IRS issues, or future tax complications.
Understanding Nondeductible IRA Contributions
What Is a Nondeductible IRA Contribution?
A nondeductible IRA contribution is a type of contribution to a traditional IRA that you cannot deduct on your tax return. This typically occurs when:
- You (or your spouse) are covered by a retirement plan at work
- Your income exceeds IRS limits for deductible contributions
While the initial contribution is not tax-deductible, the earnings within the IRA grow tax-deferred. At withdrawal, the portion of the distribution that represents your nondeductible contribution is tax-free, but earnings are taxed as ordinary income.
Who Should Consider a Nondeductible IRA?
You may consider making a nondeductible contribution if:
- Your income is too high to qualify for a Roth IRA
- You want to take advantage of the ‘backdoor Roth IRA’ strategy
- You want to maximize your retirement savings beyond employer-sponsored plans
Using Fidelity for nondeductible IRA contributions offers online tools and account support that make the process more transparent and manageable.
How to Open a Traditional IRA at Fidelity
Step 1: Create or Log In to Your Fidelity Account
If you don’t already have a Fidelity account, start by creating one on their website. If you already have an account, simply log in. Choose Traditional IRA as the account type during setup.
Step 2: Provide Your Personal Information
You’ll be asked for your Social Security number, contact details, employment status, and financial background. This information is used to verify your identity and comply with financial regulations.
Step 3: Fund the Account
You can fund your new IRA by:
- Linking a bank account for electronic transfer
- Rolling over funds from another retirement account
- Mailing a check (if you prefer a manual method)
Specify that your contribution is for the current tax year and that it is a nondeductible contribution if asked.
Making a Nondeductible Contribution at Fidelity
Step 1: Navigate to the Contribution Page
Once your IRA is active, log in and go to the Transfers & Payments section. Select Contribute to an IRA. Choose the Traditional IRA account you just opened or already have.
Step 2: Choose Contribution Details
Indicate the amount you want to contribute and select the applicable tax year. Confirm that the funds are personal contributions, not rollover or transfer funds. Fidelity may not automatically label contributions as nondeductible, so it’s important to keep accurate records yourself.
Step 3: Confirm and Submit
Review your details and submit the contribution. You should see a confirmation message once the funds are successfully deposited into your IRA.
Tracking Nondeductible IRA Contributions
Importance of IRS Form 8606
To inform the IRS that your contribution is nondeductible, you must file Form 8606 with your tax return. This form tracks your basis in the IRA the amount you’ve already paid taxes on. Failing to file this form could result in double taxation during retirement withdrawals.
How to Fill Out Form 8606
You’ll need the following information:
- Total amount contributed to your traditional IRA for the year
- Any distributions or conversions made during the year
Fidelity provides contribution summaries through your account dashboard or tax forms issued annually, which help with accurate filing.
Using a Nondeductible IRA for a Backdoor Roth IRA
What Is a Backdoor Roth?
High-income earners may not qualify for direct Roth IRA contributions. A backdoor Roth IRA allows you to bypass these limits by:
- Making a nondeductible contribution to a Traditional IRA
- Converting that contribution to a Roth IRA shortly after
This strategy can be executed through Fidelity by initiating a Roth IRA conversion from within your account.
Step-by-Step Guide to Backdoor Roth Conversion
- Contribute to your Fidelity Traditional IRA using the nondeductible method.
- Wait a few days to ensure the contribution is processed.
- Log in and select the Convert IRA option.
- Choose the amount to convert and select the destination Roth IRA account.
- Submit the conversion and track it for tax purposes.
Again, Form 8606 will play a key role in reporting both the nondeductible contribution and the Roth conversion properly.
Monitoring and Managing Your Fidelity IRA
View Your Contributions
Fidelity provides access to detailed records of your IRA transactions. Use your online dashboard to:
- View total contributions by year
- Track performance and investment allocations
- Download statements for tax filing
Stay Within Contribution Limits
For 2024, the maximum annual contribution to an IRA is $7,000 (or $8,000 if you’re age 50 or older). This total applies across all IRAs, including both traditional and Roth accounts. Exceeding the limit can lead to IRS penalties unless corrected promptly.
Tips for Making the Process Easier
- Keep Detailed Records: Note the date, amount, and source of each contribution.
- Set Calendar Reminders: Annual contributions are due by the tax deadline, usually April 15 of the following year.
- Consult a Tax Advisor: Especially if you’re using a backdoor Roth strategy, proper guidance helps you avoid costly mistakes.
- Review Fidelity’s Tax Documents: These are typically available each January and include Form 5498 (IRA Contributions) and 1099-R (Distributions).
Making a nondeductible IRA contribution through Fidelity can be a practical step in maximizing your retirement savings, especially when traditional tax-advantaged options are limited. Fidelity offers a user-friendly platform that makes setting up an IRA, contributing funds, and managing conversions simple. However, the responsibility of tracking and reporting these contributions correctly especially through IRS Form 8606 falls on you. Whether you’re planning for a backdoor Roth or simply diversifying your tax exposure in retirement, this strategy, when done correctly, can offer long-term financial benefits. Always stay informed about changing IRS rules and consider working with a financial advisor to ensure you’re maximizing the strategy without unnecessary risk or errors.