3 Paths to a Roth IRA for High-Income Earners

August 17, 2022
Three ways to contribute to a coveted Roth account if your income is above the limit.

The Roth IRA has become the 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 72 that are mandated from tax-deferred retirement accounts.

But there's a catch: Only savers with incomes at or below $144,000 in 2022 ($214,000 for married couples filing jointly) can contribute to a Roth IRA. And even then, contributions are limited to $6,000 per year ($7,000 if age 50 or older), though that limit is reduced if your income falls between $129,000 and $144,00 (between $204,000 and $214,000 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 financial planning 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:

  1. Roth 401(k): If your employer offers this option—which has no income limits—you can set aside up to $20,500 ($27,000 if age 50 or older) in after-tax contributions in 2022. However, unlike Roth IRAs, Roth 401(k)s require RMDs.
  2. Roth conversion: Those who have savings in a traditional IRA can convert some or all of that balance to a Roth IRA and pay ordinary income tax on the converted amount. 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 post-tax contributions, the converted amount will be taxable in proportion to the pretax value of the account, known as the pro rata rule.1) Note that Roth conversions are irrevocable.
  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 $61,000 in 2022 ($67,500 if age 50 or older).
  • 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.  

1Pro rata rules may apply. See IRS Notice 2014-54 for more.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

Roth IRA conversions require a 5‐year holding period before earnings can be withdrawn tax-free, and subsequent conversions will require their own 5‐year holding period. In addition, earnings distributions prior to age 59½ are subject to an early-withdrawal penalty.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.