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You Passed Roth IRA Income Limits, Where Should Your Next Dollar Go?



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Roth IRAs are incredible tools for long-term saving, and in the finance world, they epitomize the concept of delayed gratification. 

Your contributions are after-tax, meaning you don’t get any sort of “reward” upfront. However, those contributions grow tax-free and qualified distributions remain tax-free. This could be incredibly helpful in retirement if you’re trying to stay in a low tax bracket and can pull funds from this tax bucket.

Plus, Roth IRAs are the only account that doesn’t have required minimum distributions (RMDs). RMDs dictate a set amount you have to remove from your retirement accounts each year once you turn 72, but with a Roth IRA, you can remove the money on your terms when you need it (as long as you follow all the rules, of course).  

So once you’re done working, you could access some of your hard-earned money whenever you want without having to give a cut to the government—it’s a pretty sweet deal. You can even take out your contributions without penalty at any time, as long as you don’t touch the earnings. This can be a massive benefit if you plan to retire early and might not have access to other retirement accounts.

Even though you might be able to take advantage of direct funding toward your Roth IRA for a while, it probably won’t last forever, at least if the IRS has anything to say about it (and they do). The good thing is that if the government decides to get rid of Roth IRAs in the future, you’ll likely be “grandfathered in,” and your contributions will continue to grow tax-free.

There are income limits for direct contributions to Roth IRAs, so you can’t fund the account if you earn over a certain amount of money. (Six-figure income earners need to pay attention to this).

  • What are the Roth IRA income limits for 2022?
  • Can you still contribute to a Roth if you earn too much?
  • Where should you invest your money next?

Let’s find out!

Roth Contribution and Income Limits for 2022

Individual retirement accounts (IRAs) typically have more modest annual contribution limits when compared to other tax-advantaged retirement saving vehicles. 

In 2022, you can contribute up to $6,000 in an IRA (traditional or Roth). As soon as you turn 50, you can tack on an extra $1,000 in catch-up contributions. 

But as soon as your income slides into the six figures, that’s when you need to keep an eye on income limits. The IRS uses your modified adjusted gross income (MAGI) to determine your contribution eligibility. 

Your MAGI is essentially all of your earned income plus any deductions and credits you may qualify for. You can find this number on tax form 1040 under Schedule 1. 

Here are the limits if you file as single, head of household, or married filing separately.

  • You can contribute the full amount if your MAGI is less than $129,000.
  • If you earn between $129,000 and $144,000, you can contribute a reduced amount.
  • Once you hit $144,000, you can no longer contribute.

Now, let’s see how the numbers shift if you’re married filing jointly. 

  • No change if you’re MAGI is less than $204,000
  • A reduced amount if it’s between $204,000 and $214,000
  • You can’t contribute once you reach $214,000.

You might be surprised by how quickly you reach the limit, especially factoring in bonuses, raises, RSUs vesting, freelance work/side-gig income, a spouse’s income, etc. What if you accidentally contribute when you’re not supposed to?

How To Remedy An Overcontribution To Your Roth IRA

Whether you tried to put in more than $6,000 or earned too much to contribute anyway, you should take steps to fix the mistake before the tax deadline if possible. 

By breaking the contribution rules, you could face a 6% tax on any excess contributions.

Here are some ideas to consider. 

  • Withdraw any excess contributions before the tax deadline.
  • If the original tax deadline passes, you can still remove the extra money and file an amended return.
  • Recharacterize (aka convert) your Roth contributions into a non-deductible Traditional IRA before the tax deadline

Deciding the best course of action can be tricky, so working with a financial planner may be an excellent next step. They can help you create a strategy that minimizes taxes and penalties. 

A little tip: If you’re close to the income limit, wait until spring to make Roth contributions. Why? Because a draft of your tax return will be ready to review, and you can verify that you meet the income requirements.

That way, you’ll have a better idea of your income for the year and be able to contribute with confidence.

A Simpler Option: Fund A Non-Deductible Traditional IRA

So you can’t directly contribute to a Roth IRA. A great alternative could be to fund a traditional IRA. 

But if you’re above the Roth income thresholds and covered by a workplace retirement plan, you’ll have to make nondeductible contributions. Contributions to a non-deductible traditional IRA won’t lower your taxable income, but it can be an excellent way to benefit from sustained tax-free growth.

Be sure to let your accountant or tax advisor know that your contributions are non-deductible. That way, they can keep track of those contributions on a separate tax form. 

This diligent recording can save you a lot of money in the long run, especially if you have a mix of deducible and non-deductible dollars in your IRA. Keeping a clear record could mean you end up paying less tax on the distribution side or when you go to make strategic moves like a Roth conversion.

Backdoor Roth IRA: A Legal Workaround To The Income Limit Dilemma

So you might be thinking as soon as you reach the specified income limits, you can’t contribute to a Roth IRA anymore—think again. 

There’s almost always an exception to the rule, and in this case, that exception is known as a backdoor Roth IRA.

A backdoor Roth IRA enables high-earners to contribute to Roth IRAs in a roundabout fashion—like taking side roads instead of highways to get to your destination. 

With a backdoor Roth IRA, you open and contribute to a traditional IRA, then convert the funds to a Roth IRA. Sounds simple, right? The sentence may be simple, but the process isn’t, especially when you factor in taxes. 

You may have to pay some tax on the conversion, though how much depends on how much you already have in your  IRAs, how much you’re converting, and your adjusted gross income.

If you don’t have any other IRA money (only Roths and work retirement plans like 401(k)s), you’re a much better fit for a backdoor Roth than people with large IRA balances. Here’s an example. 

Say you contribute $6,000 to an IRA and convert it to a Roth IRA the next day. If it’s just in cash, there’s still $6,000 now in a Roth IRA, and no investment gains to pay taxes.

The process becomes even more complex if you have multiple IRAs, such as a SEP-IRA, Simple IRA, Rollover IRA, etc. because the IRS considers your total IRA value (the pro-rata rule) when determining how much you owe in taxes. So the backdoor strategy isn’t always a good fit for everyone (this is where CPAs come in handy, and I am not one).

If you’re interested in pursuing this strategy, consult with your CPA or tax professional and your financial planner to help you create a thoughtful plan that works for you.

A Roth By Any Other Name, A Roth 401(k)

Roth IRAs aren’t the only Roth account in play. If you find yourself over the income threshold, you can also contribute to a Roth 401(k) if your plan allows. 

The mechanics of these accounts are the same: after-tax contributions, tax-free growth, and tax-free distributions (when you follow the rules). 

But Roth 401(k)s are different in a few critical ways. First, contribution limits are far higher. In 2022, you can put $20,500 into a Roth 401(k). If you’re over 50 and qualify for catch-up contributions, you can tack on an extra $6,500.

That means you can save an extra $14,500 in a Roth 401(k) versus a Roth IRA! 

Next, Roth 401(k)s don’t have any income restrictions, so you can contribute to this account no matter what you earn, though it usually makes sense to concentrate Roth contributions when you’re in a lower tax bracket. 

Roth 401(k)s are unique, but they aren’t always superior to Roth IRAs. 

IRAs typically have far more variety regarding investment selections than 401(k)s, allowing for more customization and intention in your allocations. 

Roth IRAs also have more flexibility in terms of withdrawals. You can withdraw your contributions, not earnings, at any time without the 10% early withdrawal penalty. There are other particular circumstances where withdrawals are either penalty or tax-free, like qualified education expenses, first-time home buying expenses, childbirth or adoption costs, a sabbatical, etc. 

You can’t say the same thing for a Roth 401(k), where you’ll likely not see your money penalty or tax-free until 59 ½. 

When does it make sense to contribute to a Roth 401(k)?

  • You’re in a lower tax bracket than typical—like the 22% instead of the 32%. (This might happen if you go from a two-income household to a one-income household).
  • You anticipate being in a higher tax bracket in retirement. You likely earn more money as you progress through your career. And if you think you’ll retire in a higher tax bracket, it might be prudent to pay more taxes now and not later. 
  • You expect tax rates to increase in the future. If tax rates are more in the future, you could be paying taxes at a lower rate today instead of a higher rate later. But remember, no one has a crystal ball.

Boost Other Retirement Contributions

Not actively contributing to a Roth IRA? No problem! There are so many tax-advantaged accounts that can set you up for success. Here are a few ideas: 

Max Out Your Traditional Pre-tax 401(k)

For starters, increase the amount you contribute to your traditional 401(k). Contributions limits are the same as the Roth, $20,500 per year. The income limit applies to all of your 401(k)s. So if you contribute to a traditional and a Roth 401(k), you can still only put in a max of $20,500 between the two in 2022. 

If you got a nice raise, perhaps you can boost your contribution percentage enough to max out your account. Doing so may lower your income enough to put you within the Roth IRA income limits after all. Even if it doesn’t, reducing your taxable income may make you eligible for other popular deductions and credits. 

Look Into A Mega Backdoor Roth

Bear in mind that the total amount you can contribute to a 401(k) in 2022, including your and your employer’s contributions (pre-tax or after-tax), is $61,000, or $67,500, including catch-up contributions.

Here’s the thing: depending on your plan administrator, you can fund your 401(k) with three types of “dollars,”

  • Traditional/pre-tax
  • Roth
  • After-tax

You might be thinking, isn’t after-tax the same thing as a Roth?

And while that’s an excellent question, a Roth 401(k) and after-tax contributions are different animals. Some 401(k) plan administrators allow you to contribute over and above the annual pre-tax limit with after-tax dollars. 

Doing so adds additional funds into your account and can be a good way to boost savings in higher-income years or if you don’t have a sizable employer match. 

After-tax contributions enable you to take advantage of tax-deferred growth, but your withdrawals will be taxed as ordinary income, which isn’t as helpful as a Roth. You might consider this option if you don’t have access to a Roth 401(k).

After-tax contributions also open the door to a one-of-a-kind opportunity called a mega backdoor Roth. A mega backdoor Roth enables you to make after-tax contributions and then immediately convert the funds to your Roth 401(k), opening the door for more tax-free funds in retirement. 

Here’s an example of a “mega” strategy.

  • Max out your pre-tax 401(k) first to lower your taxable income.
  • Determine how much your employer will contribute as part of your match (which will also funnel into the pre-tax portion).
  • Any remaining amount you can contribute to the after-tax bucket and establish an immediate conversion to the Roth bucket. 

Since mega backdoor strategies require more administrative work and fees, it’s most typical to come across this option at larger, more established companies instead of smaller businesses. If your plan allows, a mega backdoor Roth is excellent for high-income earners who want to get caught up on their retirement savings. 

Contributing to Roth accounts now is super important because you might not have this option down the road. There have been (and will probably continue to be) several legislative efforts to take away Roth opportunities for those who earn a lot of money. So, it’s important to take advantage of valuable strategies that can help you out in the future. 

If you let a $100,000 Roth IRA grow for 30+ years, imagine all the flexibility and opportunity you’ll have when you retire or step away from full-time work. Roth accounts are also wonderful for extending your legacy as your heirs won’t have to pay tax on the money. 

Retirement Buckets Full? Look To Fund Other Goals

Once you find a good rhythm with retirement savings, consider setting money aside for other important financial goals.

Protect Your Health

If you have a high-deductible health plan, you’re eligible for a Health Savings Account (HSA). An HSA offers triple tax benefits: tax-free contributions, growth, and qualified distributions. The account balance rolls over every year, enabling you to save long-term. Plus, you can choose to invest all or a portion of your HSA, putting your money in an even better position to grow. 

In 2022, you can contribute $3,650 for self-coverage and $7,300 for family coverage.

We have no idea what healthcare costs or policies will look like in the future. What we do know is that they’ll probably be expensive. Consistently saving in an HSA is an excellent way to preserve your retirement assets because you have another account to tap. 

Think about it like this. Say you’re 60 and about five years away from retirement. You find out you need to have a couple of costly surgeries, so you’re for sure going to max out your deductible. Instead of drawing funds from an IRA where you’d have to pay taxes on the distribution, you could use your tax-free HSA money to help cover those costs. Keep in mind: if you’re under age 59 ½ you’d get hit with a 10% penalty for tapping your IRA early.

The healthcare landscape is constantly changing, and there may also be opportunities in the future to help cover other costly care expenses like long-term care insurance premiums. HSAs are powerful tools to extend the longevity of your retirement assets and are a great way to offer peace of mind. 

What if you aren’t in a high-deductible health plan? See if your employer offers a flexible spending account (FSA). An FSA also allows you to save for health expenses tax-free, but the funds don’t typically roll over in full, so it’s best to save only what you think you’ll use. 

Invest In Your Child’s Education

For many families, funding their child’s education is a special goal. As with most savings adventures, the earlier you start, the more options you’ll have in the future. If you find yourself with extra money at the end of the month, look into setting some aside in a 529 plan. 

What’s the best 529 plan for you? Here are a couple of things to consider. 

  • Some states offer tax benefits for contributing to their state’s 529 plan. This can be a good way to get some extra tax breaks! Review your options using this interactive map from Savingforcollege.com 
  • If your state doesn’t offer any tax incentives, search for plans that are low-cost with solid performance. Two that we often recommend are NY Saves 529 and Utah My 529 Plan. 

Plus, you don’t have to just use 529 Plans to fund college. You can use up to $10,000 from a 529 Plan per year to help cover the cost of private or religious K-12 education. With this change, 529 Plans are getting more flexible and can offer your family options as you grow. 

Learn more about 529 Plans here.

Build Your “Fun” Fund

Where should you invest for the goals you don’t know you have yet?

One option is a brokerage account. Consistent investing in a brokerage account gives your money a chance to grow without a designated purpose. Maybe you’ll use the money to help fund your child’s wedding, or perhaps it will eventually go toward a home renovation, a six-month sabbatical from work, a new private school for your child, helping out a parent or relative, or another reason you haven’t thought of yet. 

When you invest regularly, you set yourself up to say “yes” when incredible opportunities present themselves.

So if you’re at or near the Roth IRA income limit, you can see there are so many strategic options for how your next dollar can fund your future goals! It is usually a good indication that you should consider hiring a financial planner who can help you navigate through this decision and many more.

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