Smart Ways for High Earners to Contribute to Roth IRAs

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).

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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.