There are plenty of good reasons to save for retirement in a Roth IRA. For one thing, you'll get to enjoy not just tax-free growth on your investments, but also, tax-free withdrawals during retirement. And at a time in life when money may be tight, not having to lose a chunk of your income to the IRS is a good thing.
Plus, Roth IRAs do not impose required minimum distributions (RMDs). This gives you the option to keep your money invested in a tax-advantaged fashion for as long as you want. It also makes it easier to pass wealth down to younger generations should you decide this is something you're eager to do.
But in a recent CNBC survey, a good 11% of respondents said they're not contributing to a Roth IRA because their income prohibits them from qualifying. And if that's the one thing that's been stopping you from funding a Roth IRA, then you should know that there's a fairly simple workaround.
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When you're able to contribute to a Roth IRA indirectly
The income limits for Roth IRA contributions can change from one year to the next. Right now, you're barred from making Roth IRA contributions with an adjusted gross income of over $218,000 as a joint tax-filer or $153,000 as a single tax-filer. These limits could shift upward next year, or in future years, depending on wage growth.
But you should know that if you earn too much money to fund a Roth IRA directly, you can contribute to one indirectly. All you have to do is put money into a traditional IRA and then convert it to a Roth IRA after the fact.
Of course, in doing so, you'll have to pay taxes on the sum you move over. But if you were willing to pay taxes on your retirement plan contributions to begin with, this shouldn't be an issue.
Note, though, that there may be unexpected tax consequences. Some people will be able to deduct the traditional IRA contribution, offsetting the taxable income from the conversion. It can get more complicated for those who are ineligible to take the traditional IRA contribution as a deduction, however. Consulting your tax advisor is a smart move. (This paragraph was added post publication for clarity.)
You can look to a Roth 401(k) as well
It used to be that Roth IRAs were the only tax-advantaged retirement savings plan to not impose RMDs. But starting in 2024, Roth 401(k)s will not force account holders to take RMDs either. And Roth 401(k)s also don't have income limits, so higher earners are free to contribute without having to do any sort of conversion.
As such, if you have access to workplace retirement savings plan that comes with a Roth savings feature, it could pay to take advantage. That way, you can get your money into a Roth plan from the start.
Plus, Roth 401(k)s come with much higher annual contribution limits than Roth IRAs. So if you're a higher earner and can afford to allocate more money to retirement savings, then a Roth 401(k) may be a better solution for you anyway.
Saving for retirement in a Roth IRA offers a lot of benefits. But don't assume that a Roth IRA is off the table because you have higher earnings. There's a definite workaround you can explore if you're eager to make a Roth IRA your savings' home.
