Maximize Your Roth IRA

The IRS doesn’t make it easy to contribute large amounts of savings into a Roth IRA, but you should take advantage of what the rules and your income allow.

Below are five ways to contribute to a Roth, each with its own limitations, complexities, and trade-offs. They’re not mutually exclusive.*

1. Directly into a Roth IRA

If you’re eligible, you can contribute to a Roth IRA even if you contribute to a 401K, as long as your income is not too high. In 2023, the contribution limit is $6,500 for under age 50 and $7,500 for the older folks.

2. Directly into a Roth 401K

Nearly all 401K (and 403B) retirement plans offer a Roth option. Both pre-tax and Roth contributions are a good idea but the advantage of using the Roth is that you’ll have stashed away more money on an after-tax basis as the rules allow for the same contribution limits whether it’s pre-tax or Roth — in 2023, it’s $22,500 if you’re under age 50 and $30,000 for the older folks.

Ironically, one reason to opt for pre-tax contributions to your 401K is that if your income is a bit too high to be eligible for a Roth IRA (see #1), these 401K contributions may lower your taxable income enough to get you below the income eligibility threshold.

3. Indirectly via a back-door into a Roth IRA

If your income is too high to contribute to a Roth IRA, you may be able to get there indirectly through the back-door of a pre-tax IRA. It’s a bit complicated and I recommend you consult the Google tubes but the basic idea is that anyone can make non-deductible contributions to a pre-tax IRA (no income cap) and then immediately convert it to a Roth IRA. Unlike regular Roth IRA conversions (see #5), this conversion is not taxable because you contributed after-tax money to your IRA.

Repeat every year.

There’s one catch. This doesn’t work so well if you already have a funded pre-tax IRA. The IRS requires you to calculate the taxability of the conversion on a pro-rata basis. You want to start with an empty pre-tax IRA for this.

4. Indirectly via a mega back-door into a Roth 401K

Some 401K plans (most don’t as far as I can tell) allow employees to make so-called after-tax contributions beyond the annual $22,500/$30,000 limit, up to $66,000 per year (including any employer matches).

If your plan allows this and if you have the savings and income, don’t miss this one. You can contribute tens of thousands of extra dollars per year (no tax deduction) and the money essentially goes into a Roth 401K. When you leave your employer, you can roll these contributions into a Roth IRA. This is almost magical for high income earners when available. I’m glossing over a few details but if your employer’s plan allows it, check with your plan administrator and go for it.

5. Roth IRA conversion from a pre-tax IRA or 401K

You can convert pre-tax IRAs (or old 401Ks) into a Roth IRA anytime. Read my more in-depth explanation here. Briefly, it makes sense when your income is currently low but expect it to be higher in future years.

Here are two examples when it may pay to do a conversion:

1. You’ve recently retired, your taxable income is currently low because you’re living off your savings, and you expect your income to increase in a few years when you collect Social Security and receive taxable IRA distributions.
2. You’re currently in graduate school with little or no income and expect to earn a good income after graduation.

In both of these cases, if you have the cash to pay the conversion taxes, it’s sensible to do as your current tax bracket is almost certainly lower than it will be in future years. There’s no limit on how much you can convert in any year but you should probably do smaller amounts for several years running, rather than a big chunk all at once so you don’t jump tax brackets or trigger Medicare surcharges if you’re of a certain age.

Roth IRAs are my third favorite way to save money** and my general advice is to stash as much money as you can into one over your lifetime. Your older self will be immensely grateful.

* You can learn the basics of Roth retirement accounts in a summary I wrote here.

** The only things better than a Roth IRA are health savings accounts (HSAs) for which you get a tax deduction and tax-free growth and employee stock purchase plans (ESPPs) which get you stock at a guaranteed discount. These are great but many people don’t have access to either and, like a Roth, there are limits to how much you can contribute.