What is a Roth IRA
A Roth IRA is an investment vehicle that allows people to save for retirement using after-tax dollars. Those dollars are then invested into securities like mutual funds, individual stocks, bonds, or other investable securities. The advantage of a Roth IRA is that the investment grows tax-free, and distributions can be taken tax-free after age 59 ½. This is a great way to get tax-free savings and control your tax liability in retirement. The downside is that there are some rules to how much you can contribute to a Roth IRA each year. In 2024, the maximum contribution to a Roth IRA is $7,000 ($8,000 for those over age 50). That contribution limit starts to phase out the higher your income is—specifically, your modified adjusted gross income (MAGI).
2024 Income Limits for Roth IRA Contributions
In 2024, the contribution limit starts to phase out at a MAGI of $230,000 for married couples filing a joint return and at a MAGI of $146,000 for single filers. Married couples who live together and file separately can only contribute to a Roth IRA with a MAGI of less than $10,000.
Below is a chart that shows how each filing status and income level affects the maximum Roth IRA contribution for 2024. So, how can high-income earners contribute to a Roth IRA? The Backdoor Roth IRA contribution is the answer.
Single Filers (MAGI) | Married Filing Jointly (MAGI) | Married Filing Separately (MAGI) | Maximum Contribution for individuals under age 50 | Maximum Contribution for individuals age 50 and older |
under $146,000 | under $230,000 | under $10,000 | $7,000 | $8,000 |
$147,500 | $231,000 | $0 | $6,300 | $7,200 |
$149,000 | $232,000 | $0 | $5,600 | $6,400 |
$150,500 | $233,000 | $0 | $4,900 | $5,600 |
$152,500 | $234,000 | $0 | $4,200 | $4,800 |
$153,500 | $235,000 | $0 | $3,500 | $4,000 |
$155,000 | $236,000 | $0 | $2,800 | $3,200 |
$156,500 | $237,000 | $0 | $2,100 | $2,400 |
$158,000 | $238,000 | $0 | $1,400 | $1,600 |
$159,500 | $239,000 | $0 | $700 | $800 |
$161,000 & over | $240,000 & over | $10,000 & over | $0 | $0 |
Backdoor Roth IRA Contributions
A backdoor Roth IRA contribution is a way for high-income earners to contribute to a Roth IRA regardless of income level. The basic concept is that the investor makes a non-deductible contribution to a Traditional IRA and then does a Roth Conversion to move the funds from the Traditional IRA to the Roth IRA. But it is not as simple as that.
First, you cannot make a backdoor Roth contribution if you have any funds in a Traditional IRA, SEP-IRA, or SIMPLE IRA. You could convert the balance of those pre-tax accounts to a Roth IRA, but the entire conversion will be counted as taxable income for the year it is converted. This can be a very poor decision for many people, especially if the balance of the IRA is high. A solution to this would be to do a rollover from your pre-tax IRA to an employer-sponsored plan like a 401(k). If you have a plan that allows rollovers INTO the plan, you could do a tax-free rollover to zero your pre-tax IRA balance.
Second, contributions to Traditional IRAs are non-deductible. This means that you cannot deduct backdoor Roth contributions like you could with a Traditional IRA contribution.
Third, contributions made to the Traditional IRA with the intent to convert the funds to a Roth IRA typically need to sit for about four days before conversion can happen.
Conclusion
If you think the backdoor Roth strategy is right for you, consult with a financial advisor at Whitaker-Myers Wealth Managers. We can discuss your overall financial and investment picture and help you figure out if this is something you should be doing. If it turns out the backdoor Roth strategy does not work for you, see if your employer plan will allow for Roth contributions. This would be a great alternative to contributing to a Roth IRA but would be limited to the investment options within the plan.
Roth IRAs and Backdoor Roth IRA Contributions
June 3, 2024
Kelly Kranstuber
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