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5 Ways Around Roth Contribution Limits

Business woman learns ways around Roth contribution limits

Strategies for Enhancing Your Tax-Exempt Retirement Income

Roth IRAs can be a powerful tool to accumulate post-tax retirement savings, achieve tax-deferred investment growth and receive tax-exempt withdrawals in retirement. However, contribution limits make it difficult for some investors to maximize their savings and access a tax-exempt source of retirement income.

In 2023, individuals can contribute up to $6,500 per year to a Roth IRA ($7,500 for those age 50 and older). However, the maximum contribution amount is reduced for individuals whose modified adjusted gross income (MAGI) is more than $138,000 ($218,000 married filing jointly), and no Roth IRA contributions are allowed for individuals with a MAGI of $153,000 or more ($228,000 married filing jointly).

Similarly, Roth contributions to an employer-sponsored retirement plan are limited to $22,500 in 2023, with an additional $7,500 permitted as a catch-up contribution for those age 50 and older.

If you find your after-tax savings options restricted by Roth contribution limits, there are still several Roth strategies that can help you optimize your retirement savings.

#1 – Consider a backdoor Roth IRA.

If your income exceeds the limit for direct Roth IRA contributions, a “backdoor” Roth IRA strategy can be an effective option. This strategy involves establishing a traditional IRA alongside your Roth IRA. You can make the same $6,500 ($7,500 for those age 50 and older) contribution to your traditional IRA on an after-tax basis. This means you don’t take a tax deduction in the current year for contributing to the IRA account. You then convert the funds from the traditional IRA to the Roth IRA.

Because there are no income limits for traditional IRA contributions on an after-tax basis, this strategy allows high-income earners to contribute to a Roth IRA. Because the traditional IRA contributions were made with after-tax funds, this strategy is allowed by the IRSThere’s one important caveat to this approach. If you have an existing traditional IRA that holds pre-tax money, you’ll need to move the pre-tax dollars out of the account before completing the backdoor Roth conversion. Failing to do so may subject your conversion to tax liabilities (based on the ratio of pre-tax versus after-tax dollars in the traditional account) and result in double taxation. Make sure you’re working with a qualified professional before executing on a backdoor Roth IRA.

#2 – Consider a “mega” backdoor Roth.

This strategy takes the backdoor Roth IRA to a whole new level, allowing individuals whose income exceeds IRS limits to supercharge their after-tax retirement savings. The strategy involves two steps:

  1. Make after-tax contributions to your employer-sponsored retirement plan, such as a 401k.
  2. Complete an in-plan conversion of the after-tax assets to a Roth IRA or Roth 401k.

In 2023, the IRS allows individuals to contribute up to $43,500 in after-tax assets to an employer-sponsored retirement account, assuming you’re not eligible for an employer matching contribution (if you receive an employer match, you’ll need to deduct any employer contributions from $43,500 to determine your maximum contribution amount). You can then convert those assets directly into a Roth IRA or 401k to help optimize your after-tax retirement savings.

It’s important to note that not all employer-sponsored plans allow for this type of conversion. And if creating a mega backdoor Roth account is an option for you, be aware that it’s a complex strategy with many moving parts. It’s wise to work with a wealth advisor to help avoid any potential missteps that could result in tax penalties.

#3 – Establish a spousal Roth IRA.

If you’re married and your spouse doesn’t make earned income, you may want to consider opening a spousal Roth IRA. This strategy allows you to contribute to a Roth on behalf of your spouse, essentially doubling your combined retirement savings potential. Just be sure you meet the income requirements and adhere to contribution limits for both your account and your spouse’s.

#4 – Take advantage of your Roth 401k.

While not a direct solution for overcoming Roth IRA contribution limits, contributing to a Roth 401k can be a viable alternative for high-income earners to accumulate after-tax retirement savings. Unlike a Roth IRA, Roth 401ks don’t impose income limitations. If your employer offers a Roth 401k option, it may make sense to max out your contributions to take advantage of tax-deferred growth and tax-exempt withdrawals in retirement.

#5 – Fund a Roth IRA for your child with unused 529 plan assets.

The Secure Act 2.0, passed in 2022, included a provision allowing unused 529 plan dollars to be converted to Roth IRAs for a beneficiary without incurring any taxes. The 529 account must have been open for 15 years, and the lifetime amount that can be converted from the 529 plan to a beneficiary’s Roth IRA is $35,000. The amount converted per year is subject to the same eligibility rules as making outright Roth contributions. This method can be a great way to seed the retirement savings of a child that didn’t need to use all their 529 plan money and might not have the excess cash flow to make retirement contributions as they begin their career.

It’s important to note the strategies above present various financial complexities that, if not properly planned for, can lead to additional tax liabilities. Be sure to work with a qualified wealth advisor to execute these strategies and protect your retirement savings.

If you could use some help getting started, Creative Planning is here for you. Our teams have extensive experience helping clients navigate financial challenges to help achieve their retirement goals. Schedule a call to learn more.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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