Try to avoid nondeductible IRAs if possible

Question: I want to invest in an IRA in addition to my 401(k) so I can buy some individual stocks, but I make too much to qualify for the traditional IRA deduction or to make a Roth IRA contribution. Is it worth making a nondeductible traditional IRA contribution?

Answer: Probably not. Anyone who has earned income can contribute to a traditional IRA, regardless of their income level. However, if you earn more than a certain threshold and can participate in an employer’s retirement plan such as a 401(k), you may not be able to take a tax deduction for your contributions.

Now, there are still some benefits to making nondeductible traditional IRA contributions. The most significant one is tax deferral. Even if you can’t deduct your contributions, your investments can grow and compound without annual capital gains or dividend taxes. You won’t have to pay a penny in taxes on your gains until you withdraw them. This can be a valuable feature.

Having said that, there are almost always better choices – foremost among them, increasing your contributions to your employer’s plan.

While you generally can’t buy individual stocks through your employer’s 401(k) or other qualified plan, you are allowed to contribute up to $18,500 of your salary to such accounts for 2018 – which adds up to a big potential exclusion from your taxable income. And, if you’re over 50, the limit jumps to $24,500.