Roth IRA accounts can be a desirable retirement savings option for many people. Here are some ways to max out your Roth IRA.
IRA Contribution Limits
The contribution limits for both Roth and traditional IRA accounts is $6,000 plus an additional $1,000 catch-up for those who are 50 or over for 2020. If you are eligible based on your income, the easiest way to max out your Roth IRA account each year is to contribute the maximum allowed based upon your age and income.
Roth IRA Contribution Limits – Income
Your income is a factor in determining if you are able to contribute to a Roth IRA at all. For 2020 these are the income limitations* on Roth IRA contributions:
Single filers, head of household or married filing separately but not living with your spouse at any point during the year:
- There is no reduction in the amount you can contribute if your income is below $124,000.
- There is a contribution phaseout if your income ranges from $124,000 to $139,000.
- No Roth IRA contributions are allowed if your income exceeds $139,000.
Married filing jointly:
- There is no reduction in the amount you can contribute if your income is below $196,000.
- There is a contribution phaseout if your income ranges from $196,000 to $206,000.
- No Roth IRA contributions are allowed if your income exceeds $206,000.
Married Filing Separately but did live with their spouse at any point during the year:
- There is a contribution phaseout at income levels of $10,000 or below, no Roth IRA contributions can be made if your income is $10,000 or above.
*Note that income here refers to modified adjusted gross income (MAGI).
For those whose income would result in a phaseout, they will be limited as to the amount they can contribute to a Roth IRA for 2020. For example, if a single filer who is under age 50 earns $131,500, they would be eligible to contribute $3,000 to a Roth IRA for 2020. They could still contribute up to another $3,000 to a traditional IRA account, either on a pre-tax or after-tax basis depending upon their situation.
If the single filer’s income was over $139,000 they would be ineligible to make a Roth IRA contribution for the year.
For those whose ability to contribute to a Roth IRA is limited, as well as those who would like to otherwise max out the amount in their Roth IRA over time, there are some other options to consider.
If you have money in a traditional IRA account you can convert some or all of that money to a Roth IRA. You will pay tax on the amount converted, with the exception of any contributions made on an after-tax basis. If you convert part of your traditional IRA balance and some of the funds in your traditional IRA account consists of after-tax contributions including all money in a traditional IRA account if you have more than one, then the amount taxed would be pro-rated between pre-tax and after-tax contributions. The pool of funds that would be subject to taxes would also include any earnings on amounts contributed on an after-tax basis.
A backdoor Roth is a tactic to be able to contribute to a Roth IRA for those whose incomes would otherwise preclude this ability, rather than a type of account.
This technique involves contributing to a traditional IRA account and then doing a Roth conversion.
If you make an after-tax contribution to a traditional account and then do the conversion soon after, the conversion might not be subject to taxes at all, or very minimally if you had any gains on the money invested. This would be the case if you didn’t have other money already in a traditional IRA account as discussed in the section above. This process could be repeated each year and to the extent you didn’t have other money in a traditional IRA account, the conversions would be all or mostly tax-free.
The backdoor Roth can still be done if you have funds in a traditional IRA, but the conversion would be subject to tax in proportion to the ratio of Roth to traditional funds in your accounts as described in the Roth conversion section above.
Mega Backdoor Roth
A mega backdoor Roth is a technique that can be used by some investors with their employer-sponsored 401(k) under certain conditions:
- The plan must allow you to make after-tax contributions.
- The plan must allow in-service withdrawals.
If this is the case, you would make after-tax contributions of up to $37,500 which is the maximum amount of combined employee/employer contributions that can be made to the plan on your behalf over and above your employee deferral contributions. The contributions must be made to a traditional 401(k) account.
You would then withdraw this amount from the plan as a rollover to a Roth IRA account outside of the plan.
The number of 401(k) plans that offer the right conditions for this maneuver is a relatively small number in terms of the total number of plans out there.
Roth 401(k) contributions
For those interested in maxing out the amount in their Roth IRA, consider a Roth 401(k) account contribution if your employer offers one, or if you are self-employed consider contributing to a Solo 401(k) with a Roth option.
The total amount that can be contributed to a Roth 401(k) account is not subject to income limitations like a Roth IRA. The only limits on how much can be contributed to a Roth 401(k) option are the contribution limits for employee deferrals to a 401(k) in effect for any particular year. For 2020 these limits are $19,500 with an additional $6,500 catch-up contribution limit for those who are 50 or over at any point during the year. Note any employer matching contributions must be made into a traditional account within the 401(k).
How does this help maximize your Roth IRA account? When you leave your employer, or when you terminate your Solo 401(k) account you can roll the balance in the Roth 401(k) account to a Roth IRA. In fact for most of us this is the preferred route to go since a Roth 401(k) account is subject to required minimum distributions while a Roth IRA is not. This exemption from taking RMDs extends to your spouse if they treat your Roth IRA account as their own upon your death.