Earn Too Much To Contribute To An IRA?

If you are a high income earner Traditional IRAs may be a bit frustrating. On one hand you have discretionary dollars to contribute, but on the other the extra income can often disqualify you from the tax break. That stinks!

Here are the current IRS rules regarding IRAs:

Traditional IRAs: income is limited to $69,000 if you are single and $115,000 if married

Roth IRAs: income is limited to $127,000 for singles and $188,000 if married

So what’s a saver to do that makes too much for a traditional IRA contribution? 

Roth IRAs 
If you are above the traditional IRA limits but below that of a Roth, this is an excellent option for your retirement savings. Instead of the dollars being taxed when they come out Roth IRA dollars or text before they go in. Therefore all your withdrawals are tax-free, if certain conditions are met.

The Back Door Roth
This may be my favorite option for many high income earners. In 2010 the federal government eliminated the income cap when converting to Roth IRAs from traditional IRAs. Here’s how to do it. Open a non-deductible Traditional IRA account, and then immediately roll it over into a Roth IRA. Since you’ve already funded the non-deductible Traditional IRA with post-tax dollars, you’ll only owe money on any gains your investment has made — and if you do an immediate conversion, there should be no gains and therefore no tax bill.

Your money in the Roth account will then grow completely tax-free, and you’ll owe nothing when you withdraw it during retirement. Voila!

Non-Deductible IRA
Why would you have an IRA that you cannot deduct? Tax-deferral of course! Basically you be putting after-tax dollars in, and you’ll owe taxes on the money you withdraw.

This is still better than a taxable account because all of the earnings grow tax-deferred. This will allow your money to grow for years without being taxed. Taxable brokerage accounts owe money to the IRS on interest and dividends each year, meaning there’s less money available in the accounts to benefit from compound interest.

I’m pretty sure you would agree that it’s better to have a high income. Unfortunately, figuring out a tax efficient way to get your retirement groove on is a bit of a challenge. Get all my articles delivered to your inbox each week by subscribing here FREE!