How to invest in a Roth IRA When You Make Too Much Money

If you are considering investing in a Roth IRA, it is a great way to save money for retirement.  Because, you and I know that a 401k, 457, 403, 227 isn’t enough! Wait that last one isn’t a retirement plan, but you get my point.  However, there will be a problem if you want to contribute directly to the Roth IRA if you have an income that’s too high. The good news is, there is a backdoor….


Backdoor Roth IRA for High Income Earners


If you would like to contribute to a Roth IRA but, do not meet the income guidelines, the best thing to do is to go through a tiny loophole left by congress.  This means you will need to open a non-deductible traditional IRA account. When you have successfully done so, the next thing you need to do is convert the account into a Roth IRA.


Is It Worth It?


If you were already able to convert your traditional IRA plan into a Roth IRA, the usual question is to ask is ‘is it worth it?’ Well, as long as you have the money for it, then it will be well worth it.  What do I mean by “If you have the money for it?”  Well, you will have to pay taxes on the converted money!  So, if you can afford to take a tax hit now (at your current tax rate) to avoid paying taxes later (at your possible higher tax rate) it may be worth it it.


Here is a good example of it being worth it!



Why Go Through So Much Trouble for the Roth IRA Plan?


While there is the option to get the traditional IRA, you can always depend on the Roth IRA to be a better choice. This is because this option is an amazing deal, especially if you are looking for a long-term deal where you can enjoy higher tax rates in the future. Even if you start taking money out from the account, you can still gain from it because everything is income-tax-free.


On the other hand, a traditional IRA will grow you tax-deferred earnings.  At the same time, you will have to start taking the necessary mandatory distributions the year after you have turned 70. During this time, your distributions will already start counting as an income. With the Roth IRA option, you can maintain your tax bite down in retirement.


If you have a high income and you will use the traditional IRA option, you will lose your benefits to the high marginal tax rates during your retirement; especially with the forced RMDs (Required Minimum Distribution). This is why higher earners are being prevented or limited from using the Roth IRA option so they can dodge this event.


So if you wish to invest in an IRA, and thought you were limited by your high income you should consider your options. If you have decided to go with the Roth IRA after reading this post, you will have to make sure that you understand everything necessary to make the conversion process a smooth one!


Conversion Steps…

  1. Evaluate your IRA and 401(k).
  2. Seek advice if you’re unsure.
  3. Weigh financial and tax factors.
  4. Calculate the potential tax due.
  5. Decide when to pay the tax bill.
  6. Consider when to convert.
  7. Fill out conversion paperwork.




  • Whoa! That's a huge difference.

    We try to max out our Roths each year, but so far I haven't had to deal with the income cap. Fingers crossed that'll be a problem soon! lol

  • YFS /

    You max out 401k's and Roth's each year? Ballin'!!!!!! 🙂 I agree having too much income is often a good problem to have but you lose a lot of deduction in the process. Don't get me started on the Alternative Minimum Tax!

  • No – I wish! No 401K here – I haven't looked into my options there since becoming self-employed last year.

    LOL. I promise not to hijack your comment thread with a tax debate. 🙂

  • YFS /

    You have the best retirement options as a self employed person. Start your own 401k duh.. did you know you can the terms of your own employer match? That's huge! So you can invest 17k and have a 25% employer match.. now that's way more than your Roth can do 🙂

  • I think this is a bad plan. If you can't contribute to the Roth IRA, you're paying a pretty high tax rate already.

    For me, I'm pretty sure my tax rate will be lower when I'm in retirement so there is no point paying tax now when I can put it off until later.

  • YFS /

    Joe a lot of a factors come into play when talking about a roth conversion. For example, if you do not need the funds a Roth IRA is better than a Traditional IRA because with a Traditional IRA you have RMD at 70.5. Thus, forcing you to take your money and pay taxes regardless if you need it or not. Also, Roth IRA hedges against future tax increase where as a traditional IRA does not. With wage inflation it is possible that a persons tax rate could be higher in retirement. I know for me retirement will mean that I have passive income sources matching my lifetime active income thus my tax rate will probably be the same. Just because I'm not going into a 9-5 doesn't mean I won't earn a massive income. Alas, every situation is unique and that's why personal finance is thus personal 🙂

  • Julie /

    Wow! This opportunity seems to be really nice, I haven't heard about Roth IRA before, but it must be really worth to pay the taxes now, because later, the fees and taxes could be higher. Thanks for sharing this informational article!

  • I would also consider splitting IRAs into Roth and traditional. It could be that your tax bracket may be lower when you are closer to retirement compared to now. You just never know what will happen in the future…

  • YFS /

    Wow, I thought everyone knew about the Roth IRA.. silly me lol

  • YFS /

    My crystal ball says my tax bracket will either be the same or higher, much much higher. I haven't run the numbers on splitting the contribution but because of the RMD it might not make since.

  • How to invest in a Roth IRA When You Make Too Much Money…

    If you are considering investing in a Roth IRA, it is a great way to save money for retirement.  Because, you and I know that a 401k, 457, 403, 227 isn’t…..

  • The key thing to understand here is that this discussion is for those who are above the limit to deduct the Traditional IRA deposit.

    For those choosing between deductible IRA and Roth, the discussion and analysis can get very lengthy. But in this case, the gain from the two-step is free money, and shouldn't be ignored. Great article.

  • […] Roth IRA Funds – A Perfect Retirement PlanRoth IRA, 401k, 403b, Traditional IRA Tax-Exempt or Tax-DeferredWho Qualifies For A Roth IRAHow to invest in a Roth IRA When You Make Too Much Money […]

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  • Brian /

    You can also get a Roth Individual 401(k). One thing to watch out for with Individual 401(k) plans is high fees. SHOP AROUND! Some online brokers will be happy to open an account for you with no fees (neither ongoing nor "setup"); all you have to do is call your insurance broker for a bond that should cost around $100/year.

    If you own a business and are eligible for an Individual 401(k), this is a great way to still get the deduction when your income is above the limit for Traditional IRA deductions. (The downside is that it's complicated to figure out whether you should do a Roth 401(k) or deductible.)

  • Amazing issues here. I’m very satisfied to look your article.
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    you. Will you kindly drop me a e-mail?

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