Function

• If you or your spouse is covered by an employer-sponsored retirement plan, such as a 401k or 403b plan, the IRS does not allow you to make a deductible contribution to a traditional IRA if your modified adjusted gross income exceeds the limits for your filing status. These limits are adjusted each year.
  
  

Income Limits

• For the 2009 tax year, if you are covered by a retirement plan at work, you cannot deduct any of your contribution if your modified adjusted gross income exceeds $65,000 for singles, $109,000 if you file jointly and $10,000 if you file a separate return from your spouse. If only your spouse is covered, you cannot deduct any of your contribution if your modified adjusted gross income exceeds $176,000 if you file a joint return or $10,000 if you file separate returns.
  
  

Contributions

• When you make a non-deductible contribution to your traditional IRA, you must still report it on your taxes so that the IRS has records of your contribution. You must file form 8606 and complete part one in the year that you make the contribution. In addition, you may be able to use the contribution to qualify for the Retirement Savings Credit if your adjusted gross income falls below the annual limits.
  
  

Withdrawals at Retirement

• Withdrawals from your traditional IRA that contains non-deductible contributions are treated differently for tax purposes than traditional IRAs without non-deductible contributions. When you take a qualified withdrawal, which is a withdrawal when you are 59 1/2 years old or older, only part of your withdrawal is taxable. To calculate how much is taxable, you need to calculate the percentage of your traditional IRA's value that comes from the non-deductible contributions. For example, if your IRA is worth $40,000 and you made $30,000 of non-deductible contributions, 75 percent of your withdrawals would be tax-free. However, you need to recalculate this percentage each time you take a withdrawal. You must file form 8606 with your taxes to document the tax-free percentage.
  
  

Early Withdrawals

• If you take an early withdrawal from your IRA that has non-deductible contributions, only the percentage of the withdrawal that comes from earnings is subject to income taxes and the 10 percent early withdrawal penalty. Like qualified withdrawals, you must file Form 8606 with your tax return. In addition, you must file Form 5329 to calculate the early withdrawal penalty.