What if you can’t contribute to a Roth IRA?


Roth IRAs are awesome. There’s just no other way that I can see that regular folks can invest in a way that lets money grow tax-free, without any Required Minimum Distributions or anything like that. Plus, a retirement account where you can withdraw your contributions at any time for any reason, without any penalties? This is almost too good to be true.

If you’re at a place where you have paid off your debts and can start investing, a Roth IRA is an easy choice. Here’s how to start one at Vanguard.

That’s all good, but what if you can’t contribute to a Roth IRA? I’m not talking about whether you’re ready to or not, I’m talking about not being able to. What then?

Why wouldn’t you be able to contribute to a Roth IRA?

The first reason you wouldn’t be able to contribute to a Roth IRA is the trivial case: you didn’t earn any income. You have to have earned income to contribute to a Roth IRA. So even if you’re sitting on a pile of cash, if you’re not working and earning income, you can’t contribute it to a Roth IRA. Sorry.

But that’s not really applicable to most people.

The more likely reason you wouldn’t be able to contribute to a Roth IRA is because you don’t meet the income limits.

That’s right, high-income earners aren’t welcome in the Roth IRA sandbox.

As of 2017, according to the IRS, you can contribute the maximum ($5,500 if you’re under 50, $6,500 otherwise) if you earn less than the following:

  • Single: $117,000
  • Married (filling separately): $117,000
  • Married (filling jointly): $184,000

And you can contribute nothing if you earn more than:

  • Single: $132,000
  • Married (filling separately): $132,000
  • Married (filling jointly): $194,000

If you’re in between the above values, you can contribute a fraction of the maximum. It’s a linear curve, so if you’re single and making $124,500, which is halfway in between $117k and $132k, you’d be able to contribute half of the maximum amount.

(And note for the tax wonks, these values are your modified adjusted gross income (MAGI).)

So what do you do?

If you’re left out of the Roth IRA club, don’t despair, there are a few things you can do.

  • Contribute more to your 401(k), if you have one. That doesn’t get you any tax-free withdrawals, but it’s better than nothing.
  • Some 401(k) plan administrators offer a Roth 401(k). This is the best possible option in the list, because you can still contribute money, right out of your paycheck, to a retirement account, and it grows tax-free. It’s post-tax money, of course, but a Roth 401(k) doesn’t have income limitations. (And when you leave your job, you can generally convert it to a Roth IRA.)
  • Contribute to a Traditional IRA, which also has no income limits. IRAs usually have more flexibility than 401(k) in terms of investment options, which is good, but in some cases your contributions wouldn’t be tax deductible, so you might get hit with a double-taxation situation (taxed money being taxed again at withdrawal).
  • Contribute to a self-directed investment account. This isn’t a retirement account at all, but an account set up with a brokerage firm where you can buy mutual funds. There’s no tax-advantage at all here—you have to use post-tax money, and you’ll have to pay capital gains taxes upon withdrawal—but it’s still better than putting the money in a savings account!

Savvy folks might notice that I didn’t mention anything about the dark horse of Roth contributions: the “backdoor Roth IRA conversion”. That’s a larger topic, with plenty of pros and cons, and it deserves a space all its own, so I’ll leave it go here, but just know that there is a way to potentially convert a traditional IRA contribution to a Roth IRA contribution. But it’s definitely not without its caveats.

No violins, please

If you’re making nowhere near these income levels we’re talking about, you may be playing a very small violin for the folks who make too much for a Roth IRA.

But remember that just making a high income doesn’t translate into a healthy retirement. No matter where you are in you financial journey, you need to be investing for the future. No one can get by on just socking money away. We need the growth and the return on our investments too. no matter what our income is.

Have you been left out of the Roth IRA club?

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