High earners may have a variety of options for saving for retirement—but income limits hateful that direct contributions to Roth IRAs may non be among them. This is unfortunate because Roth IRAs offer tax-free earnings growth and withdrawals in retirement,1 making them a potentially valuable part of a broader investing and taxation-planning strategy. Having both Traditional and Roth accounts can aid with tax diversification in retirement.

Hither are some strategies to consider.

Are you getting the most from your 401(k)s?

Maxing out contributions to a traditional 401(k) is a skillful place to start. Such accounts take no income phase out limits, then you lot tin can mostly contribute the lesser of your income or $19,500 (plus an additional $vi,500 if you lot are 50 or older). Pre-tax contributions to these accounts reduce your taxable income and earnings will grow on a taxation deferred basis—though distributions in retirement are field of study to be taxed at ordinary income rates in the future.

If your employer also offers access to a Roth 401(k), and so yous could consider using one to prepare aside some post-tax retirement savings. Like their traditional 401(k) counterparts, Roth 401(m)due south—unlike Roth IRAs—don't have income phase out limits. So fifty-fifty if you don't qualify for a Roth IRA because your income is above IRS income limits y'all can make later taxes contributions to a Roth 401(k). Your earnings will grow revenue enhancement-free, and y'all pay no taxes when you take withdrawals after 5 years and over the age of 59½.

Information technology should be noted that the annual contribution limit applies across all of your 401(k) accounts, not on each account individually. In 2021, contributions are capped at $nineteen,500 betwixt a Traditional and Roth 401(chiliad) and at $26,000 for those 50 and older.

Consider a Roth conversion

Converting some or all of the funds in a Traditional IRA into a Roth IRA is some other option. This would mean taking funds from traditional IRAs, paying ordinary income taxation on those funds, and rolling them into a Roth IRA. This can make sense particularly if you await to be in a higher tax bracket in the future and accept a long-time horizon.

Some advisors likewise encounter a so-called backstairs Roth IRA as another way to secure the tax features provided by Roth accounts. Information technology's a unique strategy but it could work for you. The backstairs Roth involves opening a Traditional IRA, making non-deductible contributions to it, and rolling over those funds to a Roth IRA at a later engagement. When those funds are rolled over, you'll accept to pay taxes on whatever appreciation that occurred prior to the conversion, in addition, the pro-rata rule may too apply. Still, once in the Roth IRA, the savings are eligible to grow and be distributed tax complimentary.

Meet The Backdoor Roth—Is Information technology Correct for You? for more details.

What about non-deductible IRAs?

Does information technology ever make sense to contribute to a Traditional IRA even if yous can't deduct the contributions? At the very least, y'all could still savor the potential for taxation-deferred growth in the account.

"Retrieve carefully before considering this option," Rob Williams, vice president of financial planning at the Schwab Eye for Financial Research, says. "Yous wouldn't be getting whatsoever upfront tax suspension, and future withdrawal of growth on your original contribution would be taxed at your ordinary income tax rate."

It's possible that the futurity tax rates you'd pay would exist higher than what you would owe if you'd invested in a tax-efficient manner in a regular taxable brokerage business relationship. "With today's depression long-term upper-case letter gains and qualified dividend rates, non-deductible contributions to a traditional IRA may make less sense," says Rob.

As of 2021, long-term upper-case letter gains are taxed at a federal rate of either:

  • 0% for single filers with taxable income up to $xl,400 or joint filers with taxable income upwards to $80,800.
  • 15% for unmarried filers with taxable income betwixt $40,401-$445,850 or joint filers with taxable income betwixt $80,801-$501,600.
  • xx% for single filers with taxable income above $445,850 or articulation filers with taxable income to a higher place $501,600.

In addition, unmarried filer with adapted gross income (AGI) over $200,000 or articulation filers with AGI over $250,000 may have to pay the Medicare surtax of 3.8%.

Revenue enhancement-efficient investing in a taxable account

There are many revenue enhancement-efficient means to invest in taxable accounts. If you lot don't merchandise often, individual stocks, as well equally virtually commutation-traded funds (ETFs) and index mutual funds, can result in a lower tax bill.

You may owe only the long-term uppercase gains tax rate on earnings if you lot sell an investment held longer than a yr at a gain, which is generally lower than the taxation rates on ordinary income. At that place may be some distributions along the way, simply qualified dividends from stocks are more often than not taxed at the long-term capital gain taxation charge per unit, and ETFs and index funds can be managed tax-efficiently.

Having some money in taxable accounts can provide opportunities to reduce your revenue enhancement nib by strategically harvesting losses. That'south not something y'all can do in your 401(chiliad) or any IRA. Investing in tax-advantaged municipal bonds or muni bail funds, depending on your tax bracket, tin help too.

Saving in a taxable account tin can likewise exist helpful for estate planning goals. If y'all hold long-term investments in a traditional brokerage account, you lot can donate low-cost-basis securities to clemency for a full fair market value deduction and no capital letter gains revenue enhancement. You can besides leave your appreciated shares to heirs who would receive a step-upwards in price basis.

Finally, as noted above, having money in taxable accounts besides as tax-advantaged accounts can requite you greater flexibility and admission to savings for needs prior to historic period 59½—the minimum age from which you lot tin withdraw from traditional IRAs and retirement accounts without a ten% early withdrawal penalty.2 It tin can besides provide flexibility in managing your revenue enhancement bracket every bit yous plan for mail-retirement cash flows. "This sort of tax diversification can exist helpful, no matter your hereafter tax charge per unit," says Rob.

aneYou must be 59 ½ and held the Roth IRA for 5 years before tax-free withdrawals on earnings are permitted.

iiSubject area to sure exceptions, for hardship or other situations specified past the IRS.

What you can do next

  • Every bit you're preparing your taxes, make up one's mind whether you lot'll be eligible to make a Roth IRA contribution. If you're not, consider contributions into a Roth 401(g), if your workplace offers it, Roth conversions, or saving in a taxable account.

  • For the current tax year, see if your 401(grand) programme will let you to make post-tax contributions.

  • Consider investing tax efficiently in a brokerage account and read more about tax-smart approaches to investing