The Roth IRA has become a darling of retirement savings accounts. Although funded with after-tax dollars, Roths offer tax-free withdrawals of contributions and earnings in retirement (so long as the account holder is 59½ or older and has held the account for at least five years). Plus, such funds can continue to accrue tax-free indefinitely during the owner's lifetime because they're not subject to the required minimum distributions (RMDs) starting at age 73 that are mandated from tax-deferred retirement accounts.
But there's a catch: For 2023, only savers with incomes at or below $153,000 ($228,000 for married couples filing jointly) can contribute to a Roth IRA. And even then, contributions are limited to $6,500 per year ($7,500 if age 50 or older), though that limit is reduced if your income falls between $138,000 and $153,000 (between $218,000 and $228,000 if married).
"Unfortunately, the income limits on Roth IRAs make it difficult for many higher-income individuals to contribute directly to these accounts," says Hayden Adams, CPA, CFP®, director of tax and wealth management at the Schwab Center for Financial Research. 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 $22,500 ($30,000 if age 50 or older) in after-tax contributions in 2023. Unlike Roth IRAs, Roth 401(k)s require RMDs—at least for 2023 and earlier. Starting in 2024, you'll no longer need to take annual distributions under SECURE 2.0 Act.
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.1 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.2)
"But before doing a Roth conversion, remember that once done, it can't be undone", says Hayden, "and 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 begin, verify 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 step below). If it does:
- First, max out your normal 401(k) contributions.
- Next, contribute after-tax dollars up to the overall limit of $66,000 ($73,500 if age 50 or older) in 2023, regardless of income. Take note: The rules will change in 2026 under SECURE 2.0 Act, which mandates that those earning more than $145,000 a year (indexed to inflation) will have to put their catch-up dollars in a Roth 401(k)—which means those contributions will be after-tax, though their withdrawals in retirement will be tax-free.3
- 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.
"Some of these strategies, especially the mega-backdoor Roth, can be complex, so I recommend seeking the assistance of a tax or financial professional if you're interested in pursuing them," says Hayden.
1Pre-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.
2Pro rata rules may apply. See IRS Notice 2014-54 for more.
3If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties.