Understanding Non-Deductible IRA And, unlike a Roth IRA, deductible and non-deductible IRA contributions can be combined in the same account. Non-deductible contributions to an IRA don't provide an immediate tax benefit because they're made with after-tax money, such as a Roth IRA. Let's start with the way they are similar. Neither a non-deductible IRA nor a Roth IRA allow you to deduct taxes for your contribution.
So, in both cases, you're investing after-tax dollars. You can use a non-deductible IRA to enjoy the growth of a tax-deferred investment if you can't take advantage of the deductibility of a traditional IRA. A clandestine Roth IRA refers to a two-step maneuver that people with high incomes can use to get around the income limits of Roth IRAs. If your income excludes you from the Roth option, you can simply contribute to a non-deductible IRA and then convert it to a Roth IRA.
However, basically, if you're looking for a place to store your long-term retirement savings, I can't think of a good reason to make a non-deductible IRA if you can do a traditional IRA or a Roth IRA. So the non-deductible IRA gives you the benefit of tax-deferred growth, but so can the Roth IRA, and the Roth IRA also offers other valuable tax and estate planning benefits. At the same time, income restrictions may prevent direct contributions to the other major type of IRA, the Roth IRA. A traditional deductible IRA is the most common type and is probably what most people consider an IRA.
If your IRA savings are comprised entirely of non-deductible IRAs, you can convert them to a Roth IRA relatively easily. People who contribute to a non-deductible IRA usually do so because their incomes are too high to contribute to a Roth IRA or deduct their contributions to a traditional IRA. So, if you have a Roth IRA or a traditional IRA and you have financed your 401 (k) and you still have money left over, I would probably skip the non-deductible IRA and buy an investment, such as well-growing stocks or tax-managed mutual funds that generate most of their returns through unrealized capital gains or rising stock prices. First, they contribute to a traditional IRA (which has no income limits) and then convert that IRA into a Roth one.
There is also a very good explanation of the ins and outs of Roth IRAs in the Roth IRA Guide at Fairmark headquarters. By the way, limits are the maximum you can contribute to all types of IRAs in a single year, which unfortunately means that you can't contribute the most to a Roth IRA, a deductible IRA and a non-deductible IRA. For many people, especially those with higher incomes, a non-deductible IRA is just a stop on the road to converting those funds into a Roth IRA, using a “clandestine” Roth IRA.