Retirement · September 22, 2022

Ways for High Income Earners to Save for Retirement

Saving for retirement with a Roth IRA is a smart move, especially if you expect your tax rate in retirement to be higher than your current tax rate. This is because you pay current taxes on Roth IRA contributions, and your withdrawals from qualified earnings are tax free.

Unfortunately, many individuals are prevented from directly contributing to a Roth IRA because their income is too high. Many believe that a traditional IRA funded with pre-tax dollars is their only option. However, there's another way to contribute—using the backdoor Roth IRA strategy, which can be a viable alternative to save and invest for retirement.

How the backdoor Roth IRA works

Using this strategy, you can contribute to a traditional IRA and convert the funds to move them to a Roth IRA.

After the conversion, withdrawals from earnings are tax freeD if you've owned the Roth IRA for 5 years or longer and are older than 59 1/2. You can also remove your original contributions, which are tax free at any age. If your Roth IRA has been open for 5 years or longer but you're not yet 59 1/2 you can remove earnings tax free if the withdrawal is due to disability, if it's a first-time home purchase or if you're the beneficiary of an inherited Roth IRAD.

This strategy offers the following advantages:

  • Roth IRA income limits don't apply to conversions.
  • Conversions aren't considered contributions, so the annual Roth IRA contribution limits don’t apply.
  • There's no limit to the number of times you can convert funds from a traditional IRA to a Roth IRA.
  • Annual maximums for tax-qualified IRA contributions are still applicable. However, there's no dollar maximum for how much you can convert in a year.

The backdoor Roth IRA strategy in action

The conversion begins with the distribution of all or a portion of your funds in existing traditional IRAs into a Roth IRA. Within your traditional IRA, you may have pre-tax dollars as a result of rollovers from a retirement plan or tax-deductible contributions or earnings. However, your traditional IRA could also include after-tax dollars if you've made nondeductible contributions. The tax liability on a conversion will be based on the percentage of your overall balance that hasn't been taxed yet.

As an example, let's say John is converting funds from a single traditional IRA. He has $200,000 in a traditional IRA, including $20,000—or 10%—in after-tax money. He wants to convert $40,000 into a Roth IRA using the backdoor strategy. According to federal guidelines, $4,000—or 10% of $40,000—will be converted tax free, and John will owe current taxes on the remaining $36,000. Once he qualifies, he could withdraw future earnings tax free.

The IRS pro-rata rule requires that all IRAs must be aggregated when calculating the tax consequences of a distribution from any of them. The IRS' website has more information on aggregation and contributions to IRAs. Consult with a tax advisor to determine if a tax-free conversion can occur.

Important considerations

The backdoor conversion strategy may fit well with your financial plan. As you think through your options, There are a few things to consider.

  • Know the difference. Are your traditional IRA retirement funds before-tax or after-tax dollars? Only after-tax money moves tax free, and current income taxes must be paid on any pre-tax money converted to a Roth IRA.
  • Recognize that you can't undo it. No recharacterizations are available. Once you execute a conversion from a traditional IRA to a Roth IRA, you’re not allowed to undo the transaction.
  • Understand the 5-year rule. A conversion must remain intact for at least 5 years before a tax-free withdrawal can be made from the Roth IRA. The 5-year period begins at conversion.
  • Pass the age rule to withdraw funds. To withdraw Roth IRA funds tax free, you must be over 59 1/2 years old.
  • Avoid penalties. You could be subject to a 10% early distribution penalty if you withdraw money from the Roth IRA before meeting the age and 5-year rules.

Get started

If saving for retirement is one of your top priorities, converting a traditional IRA to a Roth IRA could be a smart move—especially if your income level prevents you from contributing to a Roth IRA. Contact your First Citizens Wealth partner to determine if this is the right retirement move for you.


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Withdrawals are not subject to federal taxes, and may not be subject to state taxes based on current state laws. 

IRS Publication 590. Always consult with your tax advisor for tax advice.

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