3 Paths to a Roth IRA for High-Income Earners

With the popularity of Roth IRAs steadily increasing, experts at Yieldstreet are cautioning high-income earners to be aware of a caveat about these retirement savings accounts. Individual contributors to a Roth IRA can earn no more than $144,000 annually. Married couples are limited to a combined income of $214,000. Despite these restrictions, there are three paths to a Roth IRA for high-income earners, institutional investors and accredited investors.

Roth IRA Benefits

Roth IRAs offer tax-free withdrawals of earnings for people over the age of 59.5 who have held the accounts for at least five years. Roth IRAs also continue to grow tax-free during the lifetime of the account owner because they are not subject to the required minimum distributions (RMDs) mandated for tax-deferred accounts for retirees over the age of 72. 

Paths to Roth IRA

Roth 401(k) - This employer-offered option imposes no income limits and allows after-tax contributions of up to $20,500 annually for individuals who are 50 years of age or younger. After 50, the maximum increases to $27,500. The only catch is Roth 401(k)s impose RMDs.

Roth conversions- A portion, or the entire balance of a traditional IRA can be converted to a Roth IRA, free of ordinary tax. This allows high-income earners to spread their conversions over multiple tax years to minimize taxation. However, the converted amount will be subject to the pro rata rule. This imposes taxation proportionate to the pre-tax value of the account, including pre- and post-tax contributions from the traditional IRA.

Backdoor Roth IRA - After-tax contributions up to the annual limit can be made to a traditional IRA and converted to a Roth, with the understanding that contributors will be subjected to the pro-rata rule outlined above. People considering this option should make certain their employer's plan permits contributions of after-tax funds greater than the annual contribution limit. They should also be certain withdrawals could be made while they are still employed. 

After maxing out normal 401(k) contributions, after-tax dollars up to the $61,000 limit for those who are 49 years of age or below and $67,500 for people who are 50 and above can be contributed. An irrevocable transfer of the post-taxation funds can then be made into a Roth IRA. This should be done as soon as possible because the rollover event will trigger taxation on those earnings.

In Summary

These strategies provide a choice of three paths to a Roth IRA for high-income earners. However, while these tactics appear to be relatively simple, anyone interested in using one of these approaches should seek the counsel of an experienced tax professional.

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Source: Yieldstreet