Roth IRAs

How To Buy a Roth IRA When You Make Too Much To Qualify For One

With their tax-free growth and tax-free withdrawals, Roth IRAs are a great deal — if you qualify. If you don’t, well, there’s still a way to get into the game in a big way.

While contributions to a Roth IRA are never tax deductible, these accounts grow tax-free and any qualified withdrawals come out tax-free as well — which makes them a great deal.

The problem is if your income is over $139,000 for a single taxpayer (or $206,000 for married filing jointly) you don’t qualify to contribute to a Roth IRA.  But there may be another way some high-income earners can still put large amounts into these Roth IRA accounts.

In 2020 anyone, regardless of how much they make, can save up to $19,500 in a regular pretax 401(k) or Roth 401(k) or similar retirement plan, and if you're 50 years of age or older, you can put in an additional $6,500, as a catch-up contribution, for a grand total of $26,000.

If you still have additional funds that you want to save, with a potential tax advantage as a goal,  you may want to consider making "after-tax contributions" to your 401(k) if your company plan allows it. 

Why? Although there are a several reasons, the most important is it may put you in a position to convert these after-tax funds to a Roth IRA, even if you earn too much money to qualify.

Roth 401(k)s versus After-Tax Contributions to Regular 401(k)s

To better understand how this works, it helps to know the similarities and differences of contributions to a Roth 401(k) and after-tax contributions put into a regular pretax 401(k). In both cases the contributions are made with after-tax money, which means these funds are not sheltered from taxes.

The contributions to a Roth 401(k) are made as part of your $19,500 maximum allowable contribution to the 401(k) plan ($26,000 for those 50 and older) and the earnings in the Roth 401(k) grow tax-free. This means upon making a qualified withdrawal (generally one where you’re at least 59½ and have met the five-year holding requirement) both the initial contributions and any earnings are forever sheltered from tax.

On the other hand, the “after-tax” contributions are not part of the $19,500 ($26,000 for those 50 or older) that all qualified participants are allowed to put into their 401(k). Instead they are “in addition” to these initial contributions and their earnings are not tax-free, but tax-deferred, with taxes owed upon withdrawal from the plan. These contributions can only go into the pretax 401(k).

The reason you can put in these additional after-tax funds, is because the IRS allows a total of up to $57,000 to be saved in a 401(k) plan for 2020 ($63,500 for those 50 and older).  This includes your initial $19,500 contribution ($26,000 for those 50 and older), any matching or profit sharing made by your employer, and finally your after-tax contributions, until your combined total from these sources gets you up to the $57,000 ($63,500 for those 50 and older).

The silver lining in making these after-tax contributions is that it’s very likely you will be able to roll them over to a Roth IRA, or in some cases to a Roth 401(k). This would then put you in a position where all the future earnings would be tax-free instead of being fully taxable upon withdrawal. In essence turning it into a giant Roth IRA.

An Example to Show How High Earners Can Pump Up Their Roth IRAs

As a simple example, let's say Bill is 60 years old, married filing a joint return with income over $206,000, which means he makes too much money to buy a Roth IRA. Because he’s 60, he qualifies for the $6,500 catch-up, so Bill could make elective deferrals into his retirement plan of up to $26,000, either in a Roth 401(k) or a regular pretax 401(k). 

Let’s assume Bill’s company plan does not offer a Roth 401(k), so he puts $26,000 into a regular pretax 401(k) for the year. Now, let's say that Bill's employer, between a company match and profit-sharing, adds another $10,000 on Bill’s behalf, which now gives him a total of $36,000 for the year.   

Since the IRS allows up to $63,500 to be saved in a 401(k) for someone 50 or older, this still leaves an additional $27,500 that Bill can put into his 401(k) plan, as after-tax contributions, if his company makes this option available.

This creates an opportunity to make a huge Roth IRA contribution, through the use of an in-service withdrawal, which is allowed by about 70% of company plans. An in-service withdrawal occurs when an employee takes a distribution from a company retirement plan, such as a 401(k), while still working for their company, and in this case, rolls it over to an IRA. This may occur any time after the employee reaches age 59½. You can verify if your plan offers such withdrawals by requesting a copy of the summary plan description.

Most company plans would allow Bill to do a partial rollover of only his after-tax contributions and any earnings attributed to these contributions. He could roll the after-tax money to a Roth IRA and the pretax earnings to a traditional IRA and avoid creating any taxable income.*

While Bill made too much money to buy a $7,000 Roth IRA, by making after-tax contributions to his 401(k) and then rolling them over, it allowed him to put $27,500 into a Roth IRA.  What a deal for Bill.

*If his company plan did not allow in-service withdrawals, Bill could still roll his after-tax contributions over to a Roth IRA  after separating from his employer, but this delay would likely create more pretax earnings — which would be taxable upon withdrawal — and less of the more desirable tax-free earnings.

About the Author

Mike Piershale, ChFC

President, Piershale Financial Group

Mike Piershale, ChFC, is president of Piershale Financial Group in Barrington, Illinois. He works directly with clients on retirement and estate planning, portfolio management and insurance needs.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 12 Best Consumer Discretionary Stocks to Buy for 2022
stocks to buy

The 12 Best Consumer Discretionary Stocks to Buy for 2022

Consumer discretionary stocks may be among 2022's most challenging places to invest in. But these picks could overcome several sector headwinds.
January 4, 2022
How to Know When You Can Retire

How to Know When You Can Retire

You’ve scrimped and saved, but are you really ready to retire? Here are some helpful calculations that could help you decide whether you can actually …
January 5, 2022


The 4 Phases of Retirement

The 4 Phases of Retirement

Retirement means more than no longer working 9 to 5. There are four phases of retirement, and you should be prepared for each one.
January 24, 2022
Addressing America’s Financial Literacy Crisis Begins at Home
personal finance

Addressing America’s Financial Literacy Crisis Begins at Home

Budgeting, investing, saving, paying bills on time … all of these skills are essential to master. To help your own kids on their path to financial suc…
January 23, 2022
Changing Jobs? Keep Your Finances in Check with This Checklist
career paths

Changing Jobs? Keep Your Finances in Check with This Checklist

Career moves have been plentiful the past year. If a change could be in the cards for you, you need to be ready with the answers to several questions.…
January 23, 2022
Is This the Year to Lower Your Taxes While Helping the Environment?
real estate investing

Is This the Year to Lower Your Taxes While Helping the Environment?

Going solar, whether for your home or for a commercial project, can bring along with it powerful tax credits for the next several years.
January 22, 2022