Individual retirement accounts (IRAs) offer tax advantages to encourage retirement savings. However, the Internal Revenue Service (IRS) imposes income limits on direct contributions to Roth IRAs to ensure equitable distribution of these benefits. High earners who exceed these limits are restricted from making direct contributions.
Income Limits for Roth IRA Contributions
The IRS establishes annual income limits for Roth IRA contributions. For 2023, the phase-out range for Roth IRA contributions is as follows:
- Single and head of household filers: $138,000 to $153,000
- Married couples filing jointly: $218,000 to $228,000
Individuals with modified adjusted gross incomes (MAGIs) above these limits cannot make direct contributions to a Roth IRA.
Backdoor Roth IRA Strategy
The backdoor Roth IRA strategy provides a workaround for high earners to contribute to Roth IRAs indirectly. This strategy involves the following steps:
- Make a non-deductible contribution to a traditional IRA. The contribution limit for 2023 is $6,500 ($7,500 for individuals aged 50 and older).
- Convert the traditional IRA balance to a Roth IRA. The conversion is not subject to income limits, allowing high earners to effectively contribute to a Roth IRA.
Tax Implications of Backdoor Roth IRA
The backdoor Roth IRA strategy can have tax implications, particularly if you have existing traditional IRA balances with deductible contributions. In such cases, a portion of the Roth conversion may be taxable. It is recommended to consult with a tax professional to determine the potential tax liability.
Other Options for High Earners
If the backdoor Roth IRA strategy is not suitable, high earners can consider alternative retirement savings options:
- Roth 401(k) contributions: Roth 401(k) plans allow high earners to make after-tax contributions that grow tax-free and can be withdrawn tax-free in retirement.
- Non-deductible traditional IRA contributions: High earners can make non-deductible contributions to traditional IRAs, which can provide tax-deferred growth. However, withdrawals in retirement will be taxed as ordinary income.
High earners are limited in their ability to make direct contributions to Roth IRAs due to IRS income limits. However, the backdoor Roth IRA strategy offers a way to circumvent these limits and take advantage of the tax benefits of Roth IRAs. It is important to consider the potential tax implications and explore alternative retirement savings options if necessary.
The $65,000 Roth IRA Mistake To Avoid
FAQ
Can high income earners contribute to IRA?
Can I contribute to IRA if my income is too high?
Why can’t rich people contribute to Roth IRA?
Can rich people use IRA?
Can high earners make direct contributions to a Roth IRA?
High earners who exceed annual income limits set by the Internal Revenue Service (IRS) can’t make direct contributions to a Roth individual retirement account (Roth IRA). The good news is that there’s a loophole to get around the limit and reap the tax benefits that Roth IRAs offer.
Should high earners invest in a Roth IRA?
High earners may have a variety of choices for saving for retirement—but income limits mean that direct contributions to Roth IRAs may not be among them. 1 This is unfortunate because Roth IRAs offer tax-free earnings growth and withdrawals in retirement, 2 making them a potentially valuable part of a broader investing and tax-planning strategy.
Can high earners open a Roth IRA?
The best option for many high earners will be using the backdoor provision for opening a Roth IRA. As of 2010, the government eliminated income limits for converting a Traditional IRA to a Roth IRA. This means that any high-income earner who’s priced out of opening a Roth account still has the opportunity to take advantage of one.
Can high earners contribute to a Roth 401(k)?
However, with some planning, even high earners can contribute to a Roth account and reap its benefits. Let’s look at four strategies to consider. 1. Roth 401 (k) If your employer offers this option—which has no income limits—you can set aside up to $23,000 ($30,500 if age 50 or older) in after-tax contributions in 2024.