For some higher-income taxpayers, neither a deduction for a traditional IRA contribution nor Roth IRA contributions are possible. Nevertheless, you can make nondeductible contributions to a traditional IRA.
After such a contribution, investment earnings are tax-free. Withdrawals are partially taxable and partially tax-free, depending on the ratio of earnings to the total amount in your IRA.
Now, taxpayers with income over $100,000 (single or joint returns) cannot convert a traditional IRA to a Roth IRA. That ceiling will be eliminated after 2009. Going forward, everyone can convert a traditional IRA to a Roth IRA, regardless of income.
Thus, nondeductible contributions to a traditional IRA for 2007, 2008, and 2009 can be converted to a Roth IRA, starting in 2010. You’ll pay tax on a conversion but there will be no tax on the portion of your IRA funded with nondeductible contributions. Five years after a Roth IRA conversion, withdrawals will be tax-free, as long as you are older than 59 1/2.