I’m Married And We Earn $250,000 Per Year Combined — This Exceeds The Roth IRA

Married and finding yourself in the frustrating position of earning above the Roth IRA limit? Don’t worry, you’re not alone. Many people encounter this obstacle when seeking to maximize their retirement savings. The good news is that there’s a strategy known as the backdoor Roth IRA that could provide a solution. This approach allows high-income earners to make contributions to a Roth IRA, regardless of income limitations.

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Traditional Vs. Roth IRAs

Individual retirement accounts (IRAs) are designed to help people save for retirement. They offer tax advantages to encourage that behavior. A Traditional IRA gives taxpayers a reduction in their taxes in the year they contribute; a Roth IRA offers tax benefits in the future when the taxpayer is ready to withdraw the money. For example, if you contribute $1,000 to an IRA in 2024, you don’t pay tax on that money in 2024, but when you withdraw in the future, it gets added to your taxable income in the future year. If you contribute $1,000 to a Roth IRA in 2024, you don’t get a tax deduction in 2024, but when you withdraw that already-taxed money in the future, you don’t have to add it to your taxable income that year.

Here’s a simple example.

*Not all of your Social Security may be subject to taxes, but in this simple example to show the difference between types of IRAs, let’s assume it will.

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To make the Roth deal even sweeter is the fact that the money you make in your investments isn’t taxable when you withdraw — pretty much the only no-tax income a taxpayer can get away with. In the example above, if you invest in the stock market and that $1,000 turns into $5,000 and you withdraw it, you don’t have to pay any tax on the $4,000 you earned over the years.

So why doesn’t everyone contribute as much as they can to a Roth all the time? Roth IRA contributions are subject to maximum contribution limits and income limits. Also, you might benefit more from an actual tax deduction right now than you would from a tax deduction a hypothetical 25 years from now, when you might not be alive, earning as much in retirement as you are as a working person or having made money over the years in your investments.

Understanding The Backdoor Roth IRA

So what if you have money in a Traditional IRA that you wish you had in a Roth because you expect to do well in the stock market in the future and think you’ll be collecting high Social Security amounts, withdrawing from your substantial retirement funds and maybe enjoying a military or other pension? You could consider recharacterizing the money in a Traditional IRA to a Roth — known as a backdoor Roth.

The backdoor Roth IRA is not an official type of retirement account but a strategy that allows high-income earners to sidestep income limits for Roth IRA contributions. It involves converting Traditional IRA funds to a Roth IRA.

Consider the case of Kelly and Tim, a married couple filing jointly. With a combined annual income of $250,000, they exceed the Roth IRA income limits for 2024. Eager to take advantage of the tax-free growth offered by a Roth IRA, they explore the backdoor Roth IRA strategy.

Key Considerations For Married Couples

Income limits: In 2024, the income thresholds for Roth IRA contributions for married couples filing jointly have seen an upward adjustment. Couples with a modified adjusted gross income (MAGI) below $230,000 are eligible to make full contributions to a Roth IRA, up to the specified annual limit. As the MAGI increases to the range of $230,000 to $240,000, the eligibility for contributions begins to phase out, with the contribution limit decreasing progressively. However, for those whose MAGI exceeds $240,000, the opportunity for direct contributions to a Roth IRA is no longer available.

For couples like Kelly and Tim, whose combined income surpasses this upper limit, an alternative strategy comes into play: the backdoor Roth IRA. This approach allows them to circumvent the direct contribution limits, thereby providing a pathway to continue their retirement savings in a tax-efficient manner, despite their higher income bracket​.

Contribution limits: The standard IRA contribution limits still apply — $7,000 per person, or $8,000 if over 50. Even though Kelly and Tim’s income exceeds…