Increasingly, individuals bear more of the responsibility for accumulating the resources needed for consumption in retirement. As employer-sponsored defined benefit plans decline in popularity, a greater emphasis is placed on employees to save at levels that are sufficient enough to maintain an optimal lifestyle in retirement.
To ensure a comfortable retirement, individuals may need to contribute sums over and above the contribution limits stated for their employer-sponsored defined contribution plans. When considering the ideal location for these additional retirement savings, people sensibly choose to take advantage of all the tax-sheltered accounts available before saving and investing assets in taxable accounts. Even though it does not allow a current year income tax deduction, a nondeductible IRA contribution proves valuable because the contributed funds benefit from growth without the friction of an annual tax drag. Over time, the benefit of tax-deferred compounding growth becomes a dominant force for accumulating a respectable retirement nest egg.