3 Paths to a Roth IRA for High-Income Earners

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.