You’ve heard it over and over again as someone
looking for good advice on growing wealth:
Contribute to a Roth IRA now when you’re younger, because you’ll
probably be in a higher tax bracket later!
That could be true, because it’s reasonable to expect you’ll earn
more as you
advance through your career and gain more
experience. The more you earn, the more you’ll pay in taxes, and Roths
are helpful because the money you withdraw is tax free.
That means you’d pay less in taxes if you paid those taxes today
on your Roth contributions (as opposed to other tax-advantaged accounts, like
401(k)s, where you don’t pay today but you do pay upon withdrawal in the
But “contribute to a Roth IRA” is not helpful advice at all if you
can’t use a Roth in the first place.
IRAs come with income caps
. For 2018, you can’t contribute to a Roth
IRA if you’re single and your modified adjusted gross income is $135,000 or if
you’re married and your MAGI is $199,000.
How to Get Around the Income Limits on Roth IRAs
Yes, there is. At least there is if you’re
considering contributing to a Roth in the usual way (by pulling up your account
and making a contribution).
But there are ways to get money into a Roth,
even if you’re over the income limit… and there are also things to do with your
money if you find you make too much to contribute normally.
Let’s look at how you can continue putting
money into your Roth even if you make over $135,000 (or $199,000 as a married
couple). That would be
through a backdoor Roth conversion.
To do this, you’d contribute money to a traditional IRA,
and then roll it over into a Roth IRA. This allows you to get money into a Roth
even if you make over the income limit. There are pros and cons to doing this,
and you’ll want to take into account the taxes you’ll need to pay on the
want to talk to (and work with) a financial planner before you do this
Making a mistake here could cost you big-time when it comes to taxes (and
that’s in addition to what you’ll pay no matter what when you convert from a
traditional to Roth IRA).
Plus, it simply may not be the right move to
make, depending on your situation.
planner can help
you evaluate your options and choose the best
In the meantime, you can also look at a few
other steps to take if you make too much to contribute to a Roth IRA.
Where to Put Your Money If You Make Too Much to
Contribute to a Roth IRA
There are many other things you can do with
money available to save and invest
than put it in a Roth IRA, so don’t get too
hung up on the fact you can’t contribute normally anymore!
Why? For starters, Roth IRA contributions are
low anyway. You can
only save $5,500 per year if you’re under age 50,
and as someone looking to accumulate and work their wealth you need to save far
more than that per year.
You could easily stash that cash in another
investment account, like a taxable brokerage account. No, you won’t enjoy as
big of tax advantage seeing as you don’t get a tax break here at all. But that
may not matter so much when you consider the tradeoff.
Remember, Roth IRAs are retirement accounts.
They come with a lot of rules and stipulations around
what you can do with the money you save there and when
you can access it
A taxable brokerage account, on the other
hand, allows you a lot more freedom and flexibility. You’ll want to invest here
specially if you’re aiming for early retirement,
so you can access your savings when you need to without facing fees for doing
so before an official retirement age.
And don’t forget about your 401(k). If you’re
not maxing that out, don’t worry about your Roth: contribute up to the limit in
this retirement plan instead.
You can contribute up to $18,500 in 2018.
Depending on your goals and financial
situation, there are other investment vehicles to explore, too. You might want
to invest in your business or in real estate.
If you want to evaluate what might be best when
“Roth IRA” is no longer the default option,
chat about the best money moves you can make to work your wealth
and increase your net worth.