Sarasota, FL / Bradenton, FL

How High-Income Earners Can Utilize the Roth

The Roth retirement account is an amazing retirement tool, nearly unsurpassed in its usefulness. The benefits it provides are nearly endless – no required minimum distributions, tax-free withdrawals on contributions AND earnings, tax-free gifts for beneficiaries, and the ability to exactly calculate retirement income without having to worry about taxes. To put it lightly, we love the Roth!

High earners can't put into a Roth directly

Unfortunately, though, high-income earners do not qualify to put directly into a Roth account. That means single filers with a MAGI (Modified Adjusted Gross Income) higher than $144,000 or joint filers with a MAGI higher than $214,000 are excluded from the Roth.
But that’s not the end of the story, because there is an IRS loophole called the Backdoor Roth Conversion. Anybody can take advantage of it – regardless of income status!

Traditional IRA vs Roth IRA

But first, before we go into detail about the Backdoor Roth Conversion, let’s refresh our memory of the differences between a Traditional IRA and a Roth IRA. You can also read our article explaining the differences HERE. If you are already familiar with the differences, feel free to skip ahead.

The Traditional IRA

A Traditional IRA is funded with PRE-TAX (tax-deferred) funds. These funds can be deducted from your yearly income, potentially keeping you in a lower tax bracket. All contributions and earnings (compound gains even!) are taxed after retirement when you start taking withdrawals. The tax bill can be so high (up to 37% of your retirement funds) that you may find yourself struggling to outlive your money, even though it probably seemed more than enough.

The Roth IRA

A Roth IRA is funded with POST-TAX funds. You take money out for taxes, then put it into your Roth account. Contributions AND earnings grow tax-free, forever, though with some minor restrictions. Even contributions can at any time be taken out without being taxed. You can keep putting into it as long as you wish and you never have to withdraw from it. In fact, it’s great as part of an estate planning strategy. So, back to that Backdoor Roth strategy.
A person with a high income may not be able to put into a Roth, but they can, of course, open a traditional IRA – there are no income limits on who can do that.

The Roth Backdoor Conversion Strategy

Since 2010, there have been no income limits in place for those who qualify to do Roth conversions. To put it straight, a person who earns $150,000 a year cannot open a Roth, but they can open a Traditional IRA. Once they put into that IRA, they simply roll those funds over into a Roth. Taxes have to be paid on any funds converted, just like how taxes are already paid on any funds put straight into a Roth.

should you convert to roth?

Now, the question of whether they should do that can be a difficult one. You want to do a Roth conversion if you feel you will be in a higher tax bracket in the future or retirement. Don’t forget about commonly overlooked retirement income streams which may bump you up a bracket as well.

Roth conversions and low taxes

Because the Tax Cut and Jobs Act (TCJA), which saw taxes slashed across the board, expires in 2025 and we can ALL expect a tax hike in 2026, converting now or at some point before December 2025 is likely to make sense.

Roth conversions in market downturns

A conversion may also be logical if markets are low and/or you are young – this allows for plenty of time for markets to rebound. Considering the greatest market runs take place during market recoveries, you’re likely to be in for some great tax-free gains. The necessity of tax deductions also plays a role (or lack thereof). If you no longer find yourself needing tax deductions to stay in a lower tax bracket, you should consider a Roth conversion.

backdoor Roth conversions could go away

Besides the TCJA expiring in 2025, another thing to keep in mind is that the Backdoor Roth Conversion was slated to be done away with by the Build Back Better Act. While that specific legislation is dead, we never know when it or a different piece of legislation prohibiting backdoor Roth conversions may be pushed through.

In Conclusion

As you may have figured out, choosing to do a conversion or perhaps a partial conversion is a tough call. That’s where we come in – we can provide a break-even analysis while taking into account your unique tax circumstances.
Click the button for a zero-obligation consultation to determine if a Backdoor Roth Conversion is right for you!

About the Author

  • Douglas Walters

    Doug is the Managing Partner of Walters Strategic Partners, LLC, a licensed Registered Investment Advisory firm. Doug is a licensed Certified Public Accountant (CPA) in the state of Florida and holds a Series 65 Investment Advisor Representative securities license. He is also a member of the AICPA. With over 28 years of experience as a CPA, he believes investment decisions should be based on decades of peer-reviewed research rather than relying on the latest “hot tip” from media outlets. This empirical evidence puts the science of investing to work for his clients.

    View all posts