Saving for retirement is a big concern for many Americans, even those who are considered high-earners. But sometimes, if your income is considered too high, you might miss out on some great savings options. That’s where something called a backdoor Roth IRA comes in. CBS News business analyst Jill Schlesinger has more.

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A backdoor Roth IRA is a financial strategy that allows high earners to contribute to a Roth IRA, even if their income exceeds the limits set by the IRS. By utilizing this loophole, individuals can take advantage of the tax benefits and potential growth of a Roth IRA, regardless of their income level.

Roth IRAs are a popular retirement savings vehicle because they allow contributions to grow tax-free and withdrawals in retirement are also tax-free. However, there are income limits that restrict who can contribute to a Roth IRA. For single filers, the phase-out begins at $125,000 and completely phases out at $140,000. For married couples filing jointly, the phase-out begins at $198,000 and completely phases out at $208,000.

For high earners who exceed these income limits, a backdoor Roth IRA can be a valuable tool for retirement savings. Here’s how it works:

1. Make a non-deductible traditional IRA contribution: High earners who exceed the income limits for a Roth IRA can still contribute to a traditional IRA. While contributions to a traditional IRA are not tax-deductible, the funds can still grow tax-deferred.

2. Convert the traditional IRA to a Roth IRA: Once the funds are in a traditional IRA, the individual can then convert the account to a Roth IRA. This conversion is not subject to the income limits that apply to direct Roth IRA contributions.

3. Pay taxes on any pre-tax contributions: If there are any pre-tax contributions in the traditional IRA, the individual will need to pay taxes on that amount when converting to a Roth IRA. However, since the contributions were made with after-tax dollars, only the earnings portion will be subject to taxation.

4. Enjoy tax-free growth and withdrawals: Once the funds are in a Roth IRA, they can grow tax-free and withdrawals in retirement are also tax-free, providing a valuable source of tax-free income in retirement.

By utilizing a backdoor Roth IRA, high earners can take advantage of the tax benefits and potential growth of a Roth IRA, even if their income exceeds the limits set by the IRS. This strategy allows individuals to save for retirement in a tax-efficient manner and can help them build a sizable nest egg for their golden years. As always, it’s important to consult with a financial advisor or tax professional to ensure that this strategy is right for your individual financial situation.