Even if your income exceeds the limit, there are still ways for you to contribute to a coveted Roth account. If there was a popularity contest in the world of retirement accounts, the Roth IRA would be claiming the crown. Although funded with after-tax dollars, Roths offer tax-free withdrawals of contributions and earnings in retirement (as long as the account holder is 59 1/2 or older & has held the account for at least five years). Additionally, such funds can continue to accrue tax-free indefinitely during the owner’s lifetime, as they are not subject to the mandated RMDs starting at age 73 in tax-deferred retirement accounts.
But here’s the catch -
For 2024, only savers at or below $161,000 or $240,000 for married couples filing jointly can contribute to a Roth IRA. And even then, contributions are limited to $7,000 per year ($8,000 if 50 or older), though that limit is reduced if your income falls between $146,000 and $161,000 (between $230,000 and $240,000 if married).
For 2025, the Roth IRA income phaseout ranges will increase as follows:
- Single Filers: From $146,000-$161,000 in 2024 to $150,000-$165,000 in 2025.
- Married Filing Jointly: From $230,000-$240,000 in 2024 to $236,000-$246,000 in 2025.
Because of these limitations on the Roth IRA, it can be difficult for high-income individuals to contribute directly to these types of accounts.However, with some planning, even high earners can contribute to a Roth account and reap its benefits. Let’s take a look at 4 strategies to consider:
1) Roth 401(k)
Employer-sponsored Roth 401(k) options sometimes have no income limits. If this is the case, you can set aside up to $23,000 ($30,500 if 50 or older) in after-tax contributions. Under the SECURE 2.0 Act, Roth 401(k)s no longer require RMDs.
2) Roth Conversion
Those who have savings in a tax- deferred account, like a traditional IRA, can convert some or all of that balance to a Roth IRA and pay ordinary income tax on the converted amount.* As a result, you might choose to spread out the conversion over multiple years to better manage the associated tax bill (If your traditional IRA includes both pre and after-tax contributions, the converted amount will be taxable in proportion to the pretax value of the account, known as the pro rata rule**)
REMEMBER:
Before doing a Roth conversion, once it’s done, it can’t be undone. Each conversion will be subject to a separate 5-year holding period rule.
3) Backdoor Roth
If you earn too much to make deductible contributions to a traditional IRA, you can still make after-tax contributions, up to the annual limit, and then convert them to a Roth. As with all Roth conversions, the pro rata rule applies.
4) Mega-backdoor Roth IRA
Before you start the process, confirm with your employer’s retirement plan administrator that your plan allows contributions of after-tax dollars above and beyond the annual contribution limit, as well as withdrawals while you’re still working (which are required to perform the final steps listed below). If it does . . .
- First, max out your normal 401(k) contributions.
- Next, contribute after-tax dollars up to the overall limit of $69,000 ($76,500 if 50 or older) regardless of income.
- TAKE NOTE: the rules will change in 2026 under SECURE 2.0 ACT. Speak with your advisor to understand the new regulations.
- Finally, make an irrevocable transfer of the after-tax funds into a Roth IRA - the sooner the better, since any earnings will become taxable once rolled over.
The strategies listed, especially the mega-backdoor Roth, are very complex and should be discussed with a financial professional. Our team is happy to help any high-income earners pursue the pathway to a Roth account that best suits them.
*Pre-tax contributions to your traditional account and any income or appreciation from those funds will be subject to taxes when converted to a Roth account. After-tax contributions will not be taxed upon conversion.
**Pro rata rules may apply.