Question: John from Delhi Township: I make more than what’s allowed to save in a Roth IRA. Am I completely out of luck? Doesn’t seem fair that I can’t get tax-free growth just because of my income.
A: As you mention, a Roth IRA – a type of account that is funded with after-tax money and grows tax free – comes with an income limitation. For 2020, any single tax filer whose modified adjusted gross income is $139,000 or more cannot contribute any money into a Roth IRA (this threshold is $206,000 for anyone who’s married and files taxes jointly).
As for why there’s an income limit? It basically comes down to fairness. The IRS doesn’t believe a highly-compensated worker should get more of an advantage saving for retirement than the worker who makes less.
However, don’t feel too slighted. There is a strategy someone like yourself can use called a ‘backdoor’ Roth IRA. All it means is making a non-deductible contribution into a traditional IRA and later converting that contribution amount to a Roth IRA. (We would strongly suggest talking to your accountant or a financial advisor before using this strategy.)
But keep in mind that converting your money via this backdoor method does not mean you’re avoiding taxes. Since the money in your traditional IRA is pre-tax money (in most cases), you’ll need to pay taxes on that money when you do the conversion. Ideally, the money you use to pay that tax bill should come from an outside source – not from the money you’re converting.
Here is the Simply Money point, is that a backdoor Roth IRA can be a smart financial maneuver for high earners who want tax-free growth. If you don’t want to mess with this process, check to see if your employer offers a Roth 401(k). This version of a Roth does not have income eligibility limits.