Smart Ways for High Earners to Contribute to Roth IRAs
You can reduce your modified adjusted gross income by contributing to a 401(k) or flexible spending account.
The law blocks Roth IRA contributions for singles whose modified adjusted gross income in 2015 exceeds $131,000 and for married couples whose MAGI exceeds $193,000. But there are ways to trim MAGI, as well as other pathways to tax-free Roth withdrawals in retirement.
First, some background: For most taxpayers, MAGI and AGI are the same, but a few deductions and exclusions must be added back to AGI to calculate MAGI. These include deductions for student-loan interest, benefits for certain employer-paid adoption expenses, and interest income from U.S. savings bonds used to pay for higher education.
Once you’ve figured out your MAGI, the most effective way to lower it is to participate in a tax-deferred employer-provided retirement plan, such as a 401(k) or 403(b). In 2015, you can contribute up to $18,000—or up to $24,000 if you’re 50 or older—which will immediately lower your MAGI. Contributions to a health savings account will do the same (see FAQs About Health Savings Accounts).
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Funds you run through a health care flexible spending account also stay out of your MAGI. As is the case with HSAs, these accounts allow you to use pretax money to pay for medical and dental expenses that aren’t covered by your insurance. The maximum amount you can contribute to a health care FSA in 2015 is $2,550. (If you’re married and both spouses are employed, each may contribute that amount to an FSA.) Working parents can also reduce their MAGI by contributing pretax money to a dependent care flexible spending account. Parents can stash up to $5,000 per year in one of these accounts to pay for the cost of providing care for a child younger than age 13.
Finally, pruning your portfolio could lower your MAGI. When you sell investments at a loss, those losses wipe out realized capital gains dollar-for-dollar (keeping the gains out of your MAGI), and up to $3,000 of excess loss can offset other kinds of income each year. (Losses that exceed $3,000 may be carried over to future years.)
Other avenues. The easiest route for high-income earners to contribute to a Roth account is through a Roth 401(k) or 403(b), if your employer offers one. (If it doesn’t, start lobbying the boss to add one.) There is no income limit to contribute, and, as noted above, you can shovel a lot more into workplace plans than the $5,500 annual limit for IRAs ($6,500 for those who are 50 and older). Contributions to a Roth 401(k) account grow tax-free—not simply tax-deferred, as in a traditional 401(k)—and withdrawals in retirement are tax-free, too.
A recent IRS ruling opened another window for high earners. If your company plan allows nondeductible contributions above the $18,000/$24,000 contribution limits for pretax and Roth accounts, those contributions (but not earnings on them) can later be rolled tax-free into a Roth IRA.
If none of these strategies gets you into a Roth, don’t despair. You have a back door. Though there are income limits on Roth IRA contributions, there are no limits on Roth conversions. That means you can contribute to a nondeductible IRA with after-tax money, then immediately convert the IRA to a Roth. As long as you convert before any gains accumulate, you won’t owe any taxes on the conversion—unless you have pretax money in another traditional IRA, perhaps from a former employer’s 401(k) plan. In that case, you’ll pay taxes based on the percentage of taxable and tax-free assets in all of your IRAs.
Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.
-
What’s the Difference Between a CPA and a Tax Planner?
CPAs do the important number crunching for tax preparation and filing, but tax planners look at the big picture and come up with tax-saving strategies.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Starbucks BOGO and New Sweet and Spicy Drinks
For a limited time, Starbucks is announcing four new "swicy" drinks that are both spicy and sweet.
By Kathryn Pomroy Published
-
403(b) Contribution Limits for 2024
retirement plans Teachers and nonprofit workers can contribute more to a 403(b) retirement plan in 2024 than they could in 2023.
By Jackie Stewart Published
-
SEP IRA Contribution Limits for 2024
SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 a year.
By Jackie Stewart Published
-
Roth IRA Contribution Limits for 2024
Roth IRAs Roth IRA contribution limits have gone up for 2024. Here's what you need to know.
By Jackie Stewart Published
-
SIMPLE IRA Contribution Limits for 2024
simple IRA The maximum amount workers at small businesses can contribute to a SIMPLE IRA increased by $500 for 2024.
By Jackie Stewart Published
-
457 Contribution Limits for 2024
retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
By Jackie Stewart Published
-
Roth 401(k) Contribution Limits for 2024
retirement plans The Roth 401(k) contribution limit for 2024 is increasing, and workers who are 50 and older can save even more.
By Jackie Stewart Published
-
Is a Medicare Advantage Plan Right for You?
Medicare Advantage plans can provide additional benefits beneficiaries can't get through original Medicare for no or a low monthly premium. But there are downsides to this insurance too.
By Jackie Stewart Published
-
What You Must Know About the Different Parts of Medicare
Medicare Medicare can be complicated but we've got you covered. Here is a quick guide to the different benefits provided through each part.
By Jackie Stewart Last updated