What happens if I make too much to contribute to my Roth IRA?
Since their first introduction in 1998, Roth IRAs and strategies around their contributions have been some of the most popular topics amongst financial planners, and for good reason! However, income limits keep some high-income earners from contributing to these plans. So, what happens when you earn too much to make a Roth contribution? Are high-income earners bound to miss? While that may have been an intention when creating these income limits, there are still a few ways to work around these restrictions, namely the Backdoor Roth IRA strategy.
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What is a Roth IRA?
Roth IRAs allow individuals to make after-tax contributions to this account and let it grow until their use in retirement. As long as they follow the rules and timelines associated with Roth IRAs (very important), when they make these withdrawals, they will be 100% tax-free.
Let’s take a hypothetical scenario. If someone begins making Roth IRA contributions at age 18, they can easily have 50 years or more of tax-free growth by the time they use these funds in retirement. To put that in perspective, on January 2, 1975 the S&P 500 opened at 68.65 and 50 years later on January 2, 2025 it opened at 5,903.23, which is nearly an 8,500% increase! That means that if you contributed $5,000 to a Roth IRA on January 2, 1975 you would have nearly $425,000 in tax-free income for you to use during your retirement by the beginning of this year! Please note, however, that past performance is no guarantee of future results.
Even if we ignore the fact that this would not be possible because Roth IRAs were introduced in 1998, as we said earlier, and set expectations that the market may not grow as quickly over the next 50 years as the previous, this still illustrates how powerful a tool Roth IRAs can be when planning for your retirement.
For many people, getting money into your Roth IRA is as simple as making a contribution. Anyone with earned income (wages, salaries, self-employment income, etc. - investment income does not count!) can make an IRA contribution, but there is a modified adjusted gross income (MAGI) phaseout limit for Roth IRA contributions specifically.
Here are the Roth IRA contribution limits for 2025:
Single filers - $150,000-$165,000,
Married joint filers - $236,000-$246,000)
If you earn too much to contribute to a Roth IRA, there are a few other strategies you can use to invest tax-efficiently.
Backdoor Roth
The first option is a strategy called a backdoor Roth. To start, you will need both a traditional IRA and a Roth IRA opened. This is a two-step process that is fairly straightforward, but with a few pitfalls to look for.
First, you will make a nondeductible, after-tax contribution to your traditional IRA. For 2025, the limit for total IRA contributions is $7,000 ($8,000 if you’re 50 or older).
After that, you will convert the funds from your traditional IRA into your Roth IRA.
Simple enough, right? While these are the only two steps to making a backdoor Roth contribution, there are other things that you need to consider before moving forward.
Pro-Rate Rule
The first place where people can get themselves into trouble when making backdoor Roth contributions is by unintentionally creating a difficult tax situation due to the Pro-Rata rule. The Pro-Rata rule determines how much a distribution, or conversion, from a traditional IRA is taxed, based on the amount of pre-tax and after-tax funds in the account. If you only have one traditional IRA and you are rolling over the complete balance that is all after-tax contributions, then this wouldn’t apply, but what if you have pre-tax dollars in the traditional IRA that you’ve contributed before deciding to do the backdoor Roth?
The Pro-Rate rule would determine that your conversion would be a proportional amount of pre-tax dollars and after-tax dollars, taking into account all of your IRAs open, not just the one you are converting from. For example, if you had $1,000 of pre-tax contributions and $1,000 of after-tax contributions in your traditional IRA, and you decided to convert $1,000 to your Roth IRA, your conversion would consist of $500 of pre-tax dollars and $500 of after-tax dollars. This means that you would owe taxes on the pre-tax portion that you converted- you don’t get to choose whether pre-tax or after-tax dollars are converted!
After making your conversion, be prepared to pay any taxes owed on converted amounts due to the Pro-Rata rule, as well as any gains that were made on your after-tax contributions between the time they were made and when those funds were converted.
Mega Backdoor Roth
Another more advanced strategy for high-income earners to get funds into Roth accounts is called the mega backdoor Roth, which is a super-charged version of the backdoor Roth. It is only available to certain individuals, though. This strategy works for those who have a 401(k) plan that accepts after-tax contributions and can either do an:
In-plan Roth conversion, or
In-plan rollover to a Roth IRA.
Not all 401(k) plans accept after-tax contributions or do in-plan Roth conversions, and even fewer allow for in-plan rollovers. It’s important to check with your plan provider before moving forward.
It’s also important to understand the components of 401(k) contributions and their limits. The three components to 401(k) contributions are:
Employee deferrals
The employer match
After-tax contributions
Between all three contribution types, the maximum that can be contributed to a 401(k) in 2025 is $70,000. Of that $70,000, the maximum that can be contributed as an employee deferral is $23,500 (If under 50 years old). So, depending on your employer's match, that leaves up to an additional $46,500 in after-tax contributions that you can make and ultimately get into your Roth account. When compared to the amount you can contribute to your Roth via the standard backdoor Roth strategy, you can understand how this strategy got its name!
To summarize, when performing a Mega Back Door Roth conversion, the first thing you will do is maximize your employee deferral contributions, then make after-tax contributions to your 401(k), and last is to roll over or convert those contributions to a Roth IRA or Roth 401(k).
You can make after-tax contributions any time throughout the year, but it is important to know how much your employer matches of your employee deferral, so you know how much to target in after-tax contributions throughout the year. If you accidentally contribute too much in after-tax contributions, you may limit how much you can make in regular employee deferrals or run the risk of overcontributing to your plan. This can cause tax complications and penalties.
After making your after-tax contributions, you can request an in-plan conversion or in-plan rollover to your Roth account. Some plans allow for in-plan conversions to be done automatically over set periods, or you will have to manage it yourself.
What is a Roth 401k?
In the last few years, many 401(k) plans have begun offering a Roth 401(k) option, which provides another option for people to make Roth contributions directly into their 401(k) accounts, without the usual income limits. That doesn’t mean that a mega backdoor Roth conversion couldn’t still be useful even if your plan offers a Roth 401(k), but it’s great to have options.
Timing matters!
Lastly, here is a practical consideration to keep in mind.
When making backdoor Roth or mega backdoor Roth conversions, be sure to make the conversions shortly after making contributions to make sure that gains are made in the Roth account tax-free, versus in the traditional account where they will be taxable when converting or when taken out in retirement.
Within recent years, there have been a few conversations that could impact the use of these strategies. While nothing has passed yet, there have been proposals to set income limits on Roth conversions, which could remove the ability of some high-income earners to take advantage of both the backdoor and mega backdoor options. However, it’s not all bad news, as options like the Roth 401(k) have recently become available as well.
Summary: what to do if you make too much for a Roth IRA
If you are really looking to build your Roth balances, you can take advantage of both strategies in the same year. While these strategies are great for adding additional money into your Roth accounts for tax-free growth, it is important to understand how they fit into your financial plan and goals. They can be excellent tools to help you save on taxes when in retirement, but if both strategies are used it can take up as much as $77,000 of cash flow, and even more if you are over 50 and make catch-up contributions. Consider carefully if that is something that you are able to manage.
We are fee-only financial advisors in La Jolla. If you’d like to discuss your retirement savings strategy, please reach out to set up a time.
Damon Robertson, CFP® is a financial advisor with Financial Alternatives focused on helping individuals make smarter decisions about money, investing, and planning for the future. When he’s not working with clients or writing, you can find him playing soccer, enjoying the outdoors, or engaging with his hometown community in San Diego.
Sources
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Charles Schwab. 2024-2025 Roth IRA Contribution Limits. https://www.schwab.com/ira/roth-ira/contribution-limits
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Iacurci, Greg. 2021, October 19th. CNBC. Here’s why Democrats’ proposed elimination of Roth conversions for the wealthy doesn’t start until 2032. https://www.cnbc.com/2021/10/19/heres-why-dems-proposed-elimination-of-roth-conversions-for-wealthy-doesnt-start-until-2032.html
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