My income is rising but I still want to save for retirement in a Roth IRA

A Reddit user is in a fortunate position. After a job change, his income will be high enough that he is no longer eligible to make a full contribution to a Roth IRA. 

Once income exceeds a certain threshold, eligibility to make Roth contributions phases out until it hits $0 in allowable contributions. The original poster (OP) said he will be in the phase-out range. While he is happy to be making more money, he is uncertain about the best path forward for his retirement savings because he really wants to be able to continue investing in his Roth IRA. 

So, what should the OP do in order to be able to hit his retirement savings goals despite eligibility for a Roth phasing out?

This simple solution will allow a higher earner to continue investing in a Roth IRA

The OP got some good news when he posted on Reddit. Other users explained to him that he can still put money into his Roth IRA. He just has to take an extra step to do it. 

The Redditor user can get money into his preferred account by using a process called a backdoor Roth IRA. Basically, the OP simply needs to invest the maximum allowable amount into a traditional IRA, then convert his regular IRA into a Roth IRA.

This technique works as long as you have not already made contributions in a regular IRA and as long as you make the conversion before investing the funds in your IRA and earning any gains. Otherwise, the conversion could be a taxable event because you could be taxed on withdrawn gains or because of the pro rata rule that says you must take a percentage of your withdrawal from both pre-tax and after-tax funds if you have both in the account. 

Since you can make non-deductible IRA contributions even if you are a higher earner, this technique helps you get around the Roth IRA income limits and ensure you can still make investments that come with deferred tax breaks. 

Should you use a backdoor Roth IRA?

If your goal is to get money into your Roth IRA and your income is too high, then using a backdoor Roth is a no-brainer. It’s the only effective way you can make use of this account.

However, you should make sure you have a strategic plan for exactly where you should be putting all of your retirement dollars. A Roth makes good sense for those who believe that their tax bracket is going to be higher in retirement than it currently is. That’s because you contribute to your Roth with after-tax dollars now but get to make tax-free withdrawals as a retiree. If you are concerned that you could find your Social Security benefits taxable in the future because your income is too high in retirement, then a Roth also makes good sense. 

There are plenty of other retirement accounts as well, though, including regular IRAs, traditional and Roth 401(k) accounts, and SEP and Simple IRAs. You also have the option to invest some money in a taxable brokerage account if early retirement is in the cards. 

An experienced financial advisor can help you to decide on the best way to invest for your future, to maximize your tax savings now and in retirement, and to ensure that you are setting yourself up for the life you want to live as a retiree. 

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