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11 months ago

I Earn Too Much Money for a Roth IRA. What Are My Options?


When it comes to tax-advantaged retirement plans, Roth IRAs lead the pack in many regards. Though these accounts don’t offer immediate tax savings on the contributions you make, the money you put into a Roth IRA gets to grow tax-free, and withdrawals are all yours during retirement — the IRS isn’t entitled to a portion of that money.

Furthermore, Roth IRAs don’t impose required minimum distributions, or RMDs, which otherwise force you to withdraw funds from your savings once you turn 70 1/2. Not having that requirement gives you more flexibility with your money — you can leave it invested during your golden years for added tax-free growth, or even gift it to your heirs should you choose to go that route.

Man counting hundred dollar bills


The problem with Roth IRAs, however, is that you can’t fund one directly if your earnings are too high. The threshold at which you’re barred from contributing to a Roth IRA changes from year to year, but currently, Roth IRAs are off the table once you earn more than $137,000 as a single tax filer, or more than $203,000 as a married couple filing jointly. If you make too much money for a Roth IRA, here are a couple of viable savings options to pursue instead.

1. Save in a Roth 401(k)

Though not all 401(k) plans come with a Roth savings option, many of them do. Roth 401(k)s don’t have income limits attached to them, so if you can’t fund a Roth IRA due to your earnings level but have access to a Roth 401(k), it’s probably your next best bet. Like Roth IRAs, Roth 401(k) withdrawals are tax-free in retirement, so there’s less financial stress when you’re older. One drawback you should know about, however, is that Roth 401(k)s do impose RMDs, and while you won’t have to worry about paying taxes on those distributions, you won’t get as much flexibility with your savings.

On the other hand, Roth 401(k)s come with much higher contribution limits than Roth IRAs. You can contribute up to $19,000 a year to a Roth 401(k) if you’re under 50, or up to $25,000 if you’re 50 or older. With a Roth IRA, you’re limited to $6,000 a year if you’re under 50, or $7,000 a year once you reach 50.

2. Fund a traditional IRA and convert it after the fact

Though you may not be able to contribute to a Roth IRA directly, you can always fund a traditional IRA and then convert it to a Roth account afterward. If you do so, you’ll need to pay taxes on the funds you move over the year you make that conversion, but as long as you’re prepared to fork over that sum, you can then reap the benefits Roth IRAs offer.

Having an income that exceeds the current threshold for Roth IRA contributions doesn’t mean you’re out of luck on the retirement savings front. If you’re a higher earner, you can always see about funding a Roth 401(k), or otherwise converting a traditional IRA into a Roth after the fact. Either way, it pays to save for retirement in some sort of tax-advantaged fashion. And if your income is such that you’re ineligible for a Roth IRA, it means you’re probably in a pretty good position to make sizable contributions to your nest egg.

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