Income limits can restrict eligibility for a traditional IRA’s tax deduction. They also determine who can directly contribute to a Roth IRA. These thresholds change annually and vary by filing status.
For 2024, single filers phase out of the full traditional IRA deduction between $77,000 and $87,000 of modified adjusted gross income. The phase-out range for married couples filing jointly is $123,000 to $143,000.
Roth IRA contributions have higher income limits. In 2024, the ability to contribute phases out for single filers earning between $146,000 and $161,000. For married couples filing jointly, the phase-out range is $230,000 to $240,000.
Those who exceed the Roth income limits have a strategic alternative. They can execute a Backdoor Roth IRA conversion. This involves making a non-deductible contribution to a traditional IRA and then converting it to a Roth IRA.
High earners ineligible for a deductible traditional IRA can still make non-deductible contributions. This allows their investments to grow tax-deferred. Taxes are then paid only on the earnings upon withdrawal.
Another option is to prioritize contributions to an employer-sponsored 401(k) plan. These plans have much higher income limits. They allow for significant pre-tax savings and potential employer matching funds.
For those who have maximized other accounts, a taxable brokerage account offers complete flexibility. It has no income restrictions or contribution limits. Investment gains here are subject to capital gains tax rules.
Ultimately, earning too much for direct contributions does not close the door on retirement savings. Several effective strategies exist to build a tax-advantaged portfolio. Consulting a financial advisor can help select the best path forward.
