How high earners can funnel money to a Roth IRA, the ‘gold standard' of retirement accounts

Investors with high incomes face difficulties accessing tax breaks in individual retirement accounts (IRAs). U.S. tax law imposes income limits on breaks related to Roth and traditional IRAs, limiting opportunities for high earners to take advantage of tax-sheltered savings. However, a strategy known as the “backdoor Roth IRA” provides a workaround. This involves making a nondeductible contribution to a traditional IRA and then swiftly converting the funds to a Roth account. Roth accounts offer features such as tax-free investment growth and withdrawals in retirement. Traditional IRAs have a $7,000 annual contribution limit for 2024, with additional provisions for older investors. A nondeductible IRA can be beneficial for high earners who don’t qualify for Roth IRAs or tax-deductible contributions to traditional IRAs. However, this strategy may not be suitable if investors don’t intend to use the backdoor Roth strategy. In such cases, saving in a taxable brokerage account may be more advantageous in terms of tax implications and accessibility. Taxable brokerage accounts often offer lower tax rates on profits and allow for greater flexibility in accessing funds.