Six Ways To Stuff Your Roth
I think around 25% of the content I produce touches on Roth accounts in some shape, form, or fashion.
I love freedom and Roth accounts provide it in a unique way by relieving you of all future tax liability for any money you can manage to get into a Roth IRA, 401(k), or other Roth-type retirement account.
For those of you who aren’t familiar with Roth accounts, they allow you to save money for retirement that grows completely tax-free. All earnings and future withdrawals do not have any tax obligations.
The catch is other traditional retirement accounts save on a tax-deferred basis, meaning the contributions and earnings can grow for years without being hindered by taxes.
In these accounts, taxes are owed upon withdrawal.
So, with a Roth, you pay tax on the front end. With a traditional account, you pay tax upon withdrawal.
And even though the government is happy to aid you in your retirement saving efforts, there is a limit to their generosity.
For example, Roth IRA contributions are limited to $7,000 in 2024 ($8,000 if you’re 50 or older). Other Roth accounts come with contribution limitations as well.
But, as they say, where there’s a will, there’s a way.
In the case of Roth accounts there are six ways you can stuff more into your Roth account that I’d like to share with you now.
1) Contribute Directly to a Roth IRA
MAX CONTRIBUTION: $7,000/$8,000 if 50+
If you have earned income (i.e. income that is subject to social security tax) then you can contribute directly to a Roth IRA up to the annual contribution limit or your modified adjusted gross income, whichever is lower.
The contribution limits for 2024 are in the table below.
I’d like to point out a couple of noteworthy things about the table.
First, you’ll notice that there are income limitations for direct contributions to a Roth IRA. Depending on your filing status, the amount you can contribute begins to phase out before disappearing altogether.
There are ways around this limitation which I will discuss in more detail below.
The other noteworthy point is once you reach age 50 you get to contribute more to a Roth IRA. This is called a catch-up contribution and though it may not seem like much ($1,000), it’s almost 15% more than you can contribute before you turn 50.
Fifteen percent is not an insignificant amount. If you’re able, you should take advantage of it.
Also, you may not think contributing to a Roth IRA alone is enough to fund a satisfactory retirement. Well, “satisfactory” is certainly a subjective term, but contributing up to the annual limit can grow to an impressive amount of money.
For kicks and giggles, I ran a scenario to see how much I would have in a Roth IRA if I contributed up to the annual limit every year since 2007 (when I started investing) with an assumed rate of return of 8%.
The total came out to $214,107.
Not bad.
If the balance was allowed to continue to grow without another penny of contributions, it would hit $1 million in 2044.
2) Contribute Through a Backdoor Roth IRA
MAX CONTRIBUTION: $7,000/$8,000 if 50+
Perhaps you took a look at the income limitations for Roth contributions above and realized you have the not-so-bad problem of making too much money to contribute directly.
Perhaps you’ve also noticed that I’ve used the word “directly” three times now.
That’s because there is an indirect way to still put money into a Roth IRA, but it takes an extra step and there’s a major tax hurdle you may or may not have to clear.
It’s called a backdoor Roth IRA and here’s how it works…
While there are limitations for tax-advantaged IRA contributions based on income, anyone can make non-deductible contributions to an IRA at any time (subject to the same annual limits).
Most people don’t bother because why would you tie your money up in a retirement account until age 59.5 without a tax deduction?
However, there is a sort of loophole/open door in the tax code that allows anyone to convert those same non-deductible contributions to a Roth IRA.
You will owe income tax on any earnings when you make the conversion, but if you do the conversion right after you’ve made the contribution there won’t be time for many earnings to accumulate anyway.
So…
Step 1: Contribute to an IRA on an after-tax basis.
Step 2: Convert the contribution to a Roth.
Pretty simple, isn’t it?
Well, let me through a potential kink into the works.
The IRS requires that conversions be taxed on a pro rata or proportional basis of all the non-Roth IRA funds you have for all of your IRAs.
For example, let’s assume you have a tax-deferred IRA balance of $20,000 and you want to contribute and convert $5,000 through a Backdoor Roth IRA.
If you do that, you’ll owe tax on 80% or $4,000 of the converted amount because 80% ($20,000/$25,000) of your non-Roth IRAs haven’t been taxed yet.
So, if you have a large tax-deferred IRA balance, the Backdoor Roth IRA strategy may not be worth it.
One potential workaround to open the backdoor is to roll your IRA into an employer-sponsored retirement plan like a 401(k) if your plan allows.
This way, you could move the untaxed balance out of your IRAs, leaving only the after-tax contributions thus reducing or eliminating your tax liability altogether.
3) Contribute Directly to Roth 401(k), 403(b), TSP, or 457
MAX CONTRIBUTION: $23,000/$30,500 if 50+
Speaking of 401(k)s, the next opportunity is to use an employer-sponsored retirement plan to make Roth contributions.
Years ago, an IRA was the only way to get money into a Roth account, but in 2006 legislation was introduced allowing Roth contributions within employer-sponsored plans like 401(k)s, 403(b)s, 457s, and Thrift Savings Plans.
It took a while for employers to adopt the Roth option, but now over 85% of employer-sponsored plans are available as a Roth.
One of the primary benefits of using an employer-sponsored plan is the extra contribution space it provides.
As you can see, employer-sponsored plans enjoy far more room for contributions than IRAs.
In 2024, you can contribute up to $23,000 to an employer-sponsored plan and up to $30,500 if you’re 50 or older.
Also, SECURE Act 2.0 paved the way for employer contributions to be made on a Roth basis if your plan allows.
If you elect to have your employer contributions made on a Roth basis you should keep in mind that you will owe income tax on those contributions.
Finally, SECURE Act 2.0 was originally written to require high-income individuals (AGI over $145k) who were making catch-up contributions to do so on a Roth basis only.
However, Congress wrote the law in such a way that they accidently made it impossible to legally make catch up contributions.
Oops.
There has also been a bit of an outcry about the administrative burden this will create for plan management.
Those forces combined to persuade Congress to delay this requirement until at least 2026, so stay tuned.
4) Use a Mega-Backdoor Roth
MAX CONTRIBUTION: $69,000/$76,500 if 50+
So, we just highlighted how employer-sponsored plans provide a much larger space for retirement saving than IRAs; $23,000 vs $7,000.
Well, the $23,000 tax-advantaged employee contribution limit is only part of the story.
In 2024, combined contributions by employees and employers to an employer-sponsored plan are capped at a whopping $69,000 annually, and that goes up to $76,500 for those who are 50 and older.
So, to clarify, you can contribute up to $23,000 in 2024 as an individual.
In addition to your contributions, your employer can contribute up to $69,000.
In most cases, employers do not contribute enough to fill in this gap, so it goes unused.
However, if your plan allows, you can contribute up to this upper threshold on an after-tax or non-deductible basis, then convert it to a Roth contribution.
These steps are similar to the Backdoor Roth IRA we discussed earlier.
Using this method, you could potentially get up to $69,000 into a Roth 401(k) in 2024 and up to $76,500 if you’re 50 or older.
That’s a whole lot of Roth!
Furthermore, if your plan allows, you can make an in-service distribution to a Roth IRA, effectively allowing you to move these huge sums into a Roth IRA that you control completely.
Now, I do want to draw special attention to the words “if your plan allows”.
Not all employer-sponsored plans are created equally.
Some plans allow after-tax contributions. Some don’t.
Some plans allow conversions to Roth. Some don’t.
Some plans allow in-service distributions. Some don’t.
The bottom line is your employer has the option to make your plan as flexible or rigid as they wish. You’ll need to check with your employer or read the summary plan description to find out what your options are.
5) Solo Roth 401(k)
MAX CONTRIBUTION: $69,000/$76,500 if 50+
I want to quickly highlight Solo 401(k) plans because they provide a unique saving option for sole proprietors.
The rules and contribution limits for Solo 401(k) plans are basically the same as regular 401(k) plans, but Solo plans provide a unique saving option.
If you have access to a 401(k) plan where you work and you also own a business in which you and/or your spouse are the only employees, then you can contribute to a Solo 401(k) in addition to your plan at work.
This effectively gives you double to 401(k) savings space, and if your spouse works in your business then he or she gets a contribution too.
That’s three 401(k) plans worth of saving space.
As usual, there are a couple of caveats.
First, you only get one cumulative individual contribution to all the 401(k) plans you have access to. That means if you’re under 50, your total tax-advantaged employee 401(k) contributions cannot exceed $23,000 in 2024, period.
However, as the employer, you can contribute the full $69,000 limit to your Solo 401(k), so this isn’t as big of a problem as it might sound initially.
Most folks take the employer match from their place of employment, then make employer contributions to the Solo 401(k) for whatever else they want to save.
Also, this double plan option is only available if you have a 401(k) at work, not a 403(b).
I have no idea why this rule exists, but it does.
6) Convert to a Roth
MAX CONTRIBUTION: Unlimited
We have already touched on Roth conversions, but I want to highlight the fact that there are no limitations on how much you can convert to a Roth IRA.
With that said, all conversions are taxable events and they are subject to your marginal or your highest tax bracket.
So, not only do you owe tax when you make a conversion, but if you convert so much that it pushes you into higher tax brackets then conversions begin to lose their luster.
Even so, conversions can be very helpful for a few reasons.
First, you can use conversions to access IRA money early through a Roth conversions ladder. I won’t take time for a detailed explanation here, but in summary, Roth conversions are eligible for penalty-free withdrawal five years after each conversion.
Many people use this strategy to fund an early retirement.
Another popular use of Roth conversions is tax arbitrage.
If you contribute money to a retirement plan while you have a high income, odds are you’ll want to take the tax deduction for your contributions.
Well, once you retire and your income is lower, you may want to convert your savings to a Roth in a tax year when your marginal tax rate is low.
That way, you’ve avoided higher taxes when you make contributions while also giving yourself the option of paying them when it’s convenient.
Another great reason to make Roth conversions is to avoid large required minimum distributions (RMDs) from tax-deferred accounts when you reach that age.
RMDs will remove the control you have over when you pay taxes once you reach age 73 or 75 (depending on when you were born). It may pay for you to convert much of your tax-deferred money before you lose that control.
Conversions tend to be most helpful for retirees, but I cannot overstate the potential value they provide. I would encourage you to take time to understand how they work.
Here are some links to other posts we have about Roth conversions.
Bonus: Invest Aggressively
MAX CONTRIBUTION: Unlimited
This last strategy isn’t so much about contributions as it is about maximizing the earning potential of your Roth accounts.
Using modern portfolio theory as a guide, most investors these days are thoughtful not only about their asset allocation but also about where they hold certain assets (also known as asset location).
The reason they do this is because, as we’ve already seen from this post, different accounts receive different tax treatment.
If you are trying to avoid ongoing taxes from your taxable brokerage, you should probably avoid holding bonds or dividend stocks in those accounts because they will regularly distribute earnings or yields that are subject to tax.
Since Roth accounts enjoy completely tax-free growth, it makes sense to hold your investments with the highest earning potential in a Roth account.
Typically, these are also going to be your riskiest assets so you should also have a long runway before you need these funds.
The good news is Roth accounts are also typically the last accounts you’ll want to reach into when you begin distributions in retirement, so it makes a lot of sense to allocate your growth assets into your Roth accounts.
Meanwhile, place more conservative investments (like bonds) in your tax-deferred accounts so you receive the same portfolio steadiness you would from a thoughtful asset allocation, but as it grows it grows where you want to grow the most, in the Roth.
Now, as you begin your drawdown in retirement, don’t keep holding aggressive investments in your Roth if that’s money you’ll need in the next 5-7 years.
In that case, you won’t have time to recover from an economic downturn so it makes more sense to hold safer investments like Treasuries in that window.
Wrap Up
While there is an argument for not holding 100% of your assets in Roth accounts, I’ve never actually heard anyone complain about having too much tax-free money.
I hope this information is helpful to you as you try to direct as much as you can into your own Roth.
