Income Too High for a Roth IRA

Current income limits for 2015:

  • Individual: $131,000
  • Couple filing jointly: $193,000

If your adjusted gross income (AGI) exceeds these amounts you are not eligible to contribute to a Roth IRA. Who knew making too much money was a bad thing. As always, work with a tax professional to ensure your AGI is as low as possible in order to minimize your tax burden. 

A Roth IRA is a great way investment tool and allows individuals to grow their assets without having to worry about paying taxes on gains or future distributions. 

So what do you do if you can't contribute to a Roth IRA? The first place to look is your company's 401(k) plan. The annual contribution limit is $18,000 and for traditional 401(k) plans, these contributions are tax deductible. Check to see if your company offers a Roth 401(k) plan. They're less common and just like an Roth IRA, they're powerful investing vehicles. 

If your company doesn't offer one, be a hero to your fellow employees and start pressing management to add one. 

There is no income limit to contribute to a Roth IRA. 

You get the benefits of tax free growth and withdrawals coupled with the fact that you can add $18,000 per year versus only $5,500 for a Roth IRA. That increased principle with compound nicely over the years.

Contribute to an HSA

A health savings account is also a great way to lower you taxable income and saving money in a tax deferred account.

Contributions limits to an HSA for 2015

  • Individual: $3500
  • Family: $6,500 

Health savings accounts typically offer investment options to the account owner, that's you by the way. The growth of stock and bond funds in a HSA are tax free! Also, after the age of 65 you're able to withdrawal funds for non health related purposes. You still need to pay tax as ordinary income, just like you would with a traditional IRA. 

Traditional IRA

All is not lost if you can't contribute to a Roth IRA. A traditional IRA is still a great option. They can help reduce your tax burden now, which helps as your a high earner. The growth of your assets isn't taxed, only the distributions you take later on in life. You tax bracket could be lower as your not in you prime working years, and dividend distributions aren't tax as ordinary income.

One thing to be mindful of is the required minimum distribution. Starting at age 70, you have to take money out of your traditional IRA. If you chose not to, you'll have to pay tax penalty.   

Roth IRA Conversion

There are no longer income limits for individuals who want to convert their traditional IRA into a Roth. You could contribute dollars, that aren't tax deductible, into your traditional IRA and then convert the IRA into a Roth IRA. However, when you do this, you have to pay income tax on the amount converted. Your current tax rate and timeline your converted assets will remain invested before you withdraw them are important factors to consider. 

Roth conversions are exactly simple, and it's best to consider them during years where you income tax rate will be low. That way you minimize the tax you pay during the conversion.

Taxes should always be taken into consideration when making an investment choice, but they shouldn't be the only thing that matters. As investors our goals is maximize our returns, balance risk and volatility but most importantly our assets are there to help us live rich and happy lives.