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Is your income too high for a Roth IRA, but you want to enjoy the unique benefits of this special kind of retirement account?

(Please note here that the income limit for a Roth IRA for tax year 2021 is $208,000 for Married Filing Jointly or $140,000 for Single filers.)

There is a way to get the benefits of a Roth IRA even if you are a high-income earner. It does involve some tricky administrative work, though, so it is important to do it right.

How Does a Roth IRA Differ From a Traditional IRA?

The most significant difference between a Traditional IRA and a Roth IRA is when the money is taxed, but let’s get into the details:

Back Door Roth Income Limit

An IRA is an Individual retirement account. Its purpose is for you to be able to save money for retirement in a tax-advantaged way whether or not you have an employee retirement account (hence the name, Individual). Your contributions grow tax-free, which means that your nest egg grows more quickly in a growing market.

A Traditional IRA is the more complex kind of IRA and involves more administrative paperwork. Traditional IRA funds are taxed when you take a distribution (when you pull money out of the account) depending on the basis in your Traditional IRA account.

Because Traditional IRA money is taxed when distributed, this means that (barring special circumstances) you can expect to pull the money out when you are of retirement age. If you expect your income to be lower at retirement age, a Traditional IRA is likely a good choice for you.

A Roth IRA, on the other hand, is simpler and involves you transferring money directly from your checking account into a retirement account. This money has already been taxed before hitting your checking account (if it was taxable income).

(Note that tax brackets can and do change over the course of decades, but we don’t know how or when.)

In this video, I’ll get into how to contribute to a Backdoor Roth and if it’s worth the hassle of setting up.

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