Why an IRA Makes Sense Even If It Isn’t Tax Deductible
IRA contributions that aren't tax-deductible still offer powerful tax-deferred growth, account diversification, and tax diversification in retirement — plus the backdoor Roth IRA strategy for high earners. Here is why an IRA makes sense regardless of deductibility
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When it comes to retirement contributions, many people will not fund an IRA if the contribution is not tax-deductible. That raises an interesting question: is the primary purpose of a Traditional IRA or a Roth IRA to build retirement savings, or is it primarily seen as a tax deduction in the current year?
Tax deductibility is certainly a consideration, but there are compelling reasons why an IRA makes sense even if the contribution itself is not tax-deductible. To see why, you have to look at it strictly from the retirement side of the equation.
The Earnings Are Still Tax-Deferred — Even If the Contribution Isn’t
Whether or not you can take a deduction for an IRA contribution in the current year, the earnings on the account are still tax-deferred. This means your investment continues to grow tax-free, regardless of whether the contribution was deductible.
Here is how powerful that tax deferral can be. Let’s say your combined federal and state income tax rate is 30% and you can average a 10% return on your investments. In a taxable account, your net return would be just 7%, the 10% basic return reduced by 30% for income taxes. But in an IRA, you get the full benefit of the 10% return.
Over 20 years, on a $10,000 investment:
- At 7% (taxable account): $38,697
- At 10% (IRA with tax deferral): $67,275
Just as a result of tax-deferred growth on earnings, you would have nearly $29,000 more after 20 years, without any additional contributions. That is the power of keeping investment earnings sheltered from annual taxation.
Why Contributing More to Retirement Always Makes Sense
Statistically, most people are underfunded in their retirement plans. Even if you participate in an employer-sponsored 401(k) or TSP, it may not provide as much as you will need for the retirement you want, particularly if your employer limits contributions to a percentage of your income.
For example, if you earn $50,000 per year and your employer allows you to contribute 10% of your salary, your annual contribution would be $5,000, well below the 2026 401(k) maximum of $24,500. However, many lower-income workers find that their practical contribution limit is their income percentage cap rather than the IRS maximum.
For 2026, you can contribute up to $7,500 to an IRA or $8,600 if you are age 50 or older. That means combining an IRA with your employer plan can more than double your total retirement contributions. The combined 401(k) and IRA contributions would allow you to contribute well over 20% of a $50,000 salary to retirement, significantly accelerating your path to financial independence.
For military members, the TSP functions similarly to a 401(k) and offers some of the lowest expense ratios of any retirement account available. Combining TSP contributions with a Roth IRA gives military members access to both tax-deferred and tax-free growth, one of the most powerful retirement savings combinations available.
Why You Should Spread Retirement Savings Across Multiple Accounts
Diversification matters not just in what you invest in, but in where you hold those investments. This is especially true when your retirement funds are primarily held in a company-sponsored 401(k) or TSP.
Employer plans typically come with limitations, restricted investment options, limited fund choices, and potentially higher expense ratios than what you could find on your own. By contrast, an IRA held at a typical online brokerage offers almost limitless investment choices, individual stocks, ETFs, mutual funds, REITs, and more. Greater investment flexibility can lead to higher returns and help you build a more customized portfolio aligned with your specific goals and risk tolerance.
The Tax Diversification Benefit of Non-Deductible IRA Contributions
If none of your IRA contributions are tax-deductible in the years taken, is that really a problem? Consider the following.
If all of your retirement savings are 100% tax-deferred, in a traditional 401(k), traditional TSP, or traditional IRA, then you will owe income tax on every dollar you withdraw in retirement. Combined with Social Security income and any secondary income sources, those withdrawals could push you into a significantly higher tax bracket than you anticipated.
Note: The Social Security trust fund faces long-term funding challenges worth factoring into your planning. Current projections suggest that benefits may be reduced if Congress does not act, so planning conservatively around Social Security income is prudent.
But if you made non-deductible IRA contributions over the years, that portion of your withdrawals will not be subject to income tax, only the earnings on those contributions will be taxable. This is a form of tax diversification in retirement, allowing you to withdraw at least some money without triggering additional income tax. Since tax rates rise with income level, having some non-taxable sources of retirement income can result in significant savings over a long retirement.
The Backdoor Roth IRA Strategy
High earners who cannot deduct traditional IRA contributions and who also exceed the Roth IRA income limits may want to consider a backdoor Roth IRA conversion. This strategy involves contributing to a non-deductible traditional IRA and then converting it to a Roth IRA. Since the original contribution was already made with after-tax dollars, the conversion triggers minimal additional tax in most cases.
The backdoor Roth IRA allows high earners to access the benefits of tax-free growth and tax-free withdrawals in retirement, even when direct Roth IRA contributions are not permitted due to income limits. For 2026, the Roth IRA phase-out begins at $153,000 for single filers and $242,000 for married couples filing jointly. Above these thresholds, a backdoor Roth conversion may be the most effective path to tax-free retirement savings.
Consult a fee-only financial planner or tax professional before executing a backdoor Roth conversion, particularly if you have existing pre-tax IRA balances, as the pro-rata rule may affect the tax treatment of the conversion.
Should You Contribute to an IRA Even If It Isn’t Tax Deductible?
An IRA makes sense even when contributions are not tax-deductible, for three compelling reasons. First, the earnings still grow tax-deferred, compounding without the annual tax drag that reduces returns in a taxable account. Second, combining an IRA with an employer plan significantly increases your total retirement savings capacity. Third, non-deductible contributions create valuable tax diversification in retirement, reducing the portion of your withdrawals subject to income tax.
For military members, the combination of a TSP and a Roth IRA is particularly powerful, offering both tax-deferred and tax-free growth, plus the unique ability to contribute tax-free combat zone pay to a Roth IRA. Maximizing both accounts should be a priority for any military member pursuing long-term financial independence.
