Which IRA Is Best for High-Income Earners? 4 Smart Options for Wealthy Investors

Are you making too much money for traditional retirement accounts? That’s what I call a good problem to have! But it’s still a challenge that needs solving if you want to build a tax-efficient retirement strategy

As a high-income earner, you might think that IRAs are off the table for you. The truth is, you’ve got several smart options available – you just need to know how to navigate the rules and restrictions.

What are the best IRA strategies for people with high incomes? I’ll show you how to get around income limits and what other options might help you reach your retirement goals more effectively.

Understanding the Income Limits Challenge

First, let’s talk about what the problem is: The IRS has strict rules about who can directly contribute to certain types of IRAs or deduct their contributions based on their income.

For 2025, here’s what high earners face:

Roth IRA contribution limits:

• Single filers: Contributions phase out between $150,000-$165,000 MAGI
• Married filing jointly: Phase-out between $236,000-$246,000 MAGI
• Above these thresholds? Direct Roth contributions are completely blocked

Traditional IRA deduction limits (if covered by workplace plan):

• Single filers: Deductions phase out between $79,000-$89,000 MAGI
• Married filing jointly: Phase-out between $126,000-$146,000 MAGI

When you’re trying to save as much as possible for retirement, these limits can be annoying. But don’t worry – I’ve got solutions!.

The 4 Best IRA Options for High-Income Earners

1. The Backdoor Roth IRA Strategy

This is probably the most popular workaround for high-income earners, and it’s surprisingly straightforward:

Step 1: Make a non-deductible contribution to a Traditional IRA (there’s no income limit for this)
Step 2: Convert that Traditional IRA to a Roth IRA shortly afterward

The beauty of this strategy is that since you’ve already paid tax on the contribution (it was non-deductible), you typically only pay taxes on any earnings that occurred between contribution and conversion. If you convert quickly, this amount is minimal or zero.

Watch out for the Pro-Rata Rule! This is super important. If you already have money in a Traditional, SEP, or SIMPLE IRA that is not taxed, the IRS will treat all of them as a single account. You can’t cherry-pick just the non-deductible portion to convert.

For example, if you have $93,000 in pre-tax IRA funds and make a new $7,000 non-deductible contribution, 93% of any conversion will be taxable. So if you convert $7,000, you’d owe taxes on $6,510.

Required Tax Reporting: You must file Form 8606 with your tax return to report non-deductible contributions and Roth conversions. This form tracks your “basis” (after-tax money) in your Traditional IRAs.

2. Mega-Backdoor Roth Conversion

For those who really want to supercharge their Roth savings, the mega-backdoor Roth might be an option. This strategy works if your employer’s 401(k) plan allows for:

1. After-tax contributions above the normal annual limits
2. Either in-plan Roth conversions OR in-service withdrawals

Here’s how it works:

1. Max out your normal 401(k) contributions first ($23,500 for 2025, plus catch-up if eligible)
2. Make additional after-tax contributions up to the overall limit ($70,000 total for 2025, or higher with catch-up contributions)
3. Convert these after-tax contributions to a Roth account

This strategy can potentially allow you to contribute tens of thousands more to a Roth account than the standard $7,000 limit!

3. Roth 401(k)

If your employer offers a Roth 401(k), this is a fantastic option because:

• No income limits apply (unlike Roth IRAs)
• Higher contribution limits than IRAs ($23,500 for 2025, plus catch-up contributions)
• Ages 60-63 can make even larger catch-up contributions of $11,250 (for a total of $34,750)

Keep in mind that employer matches to your Roth 401(k) may go into a traditional 401(k) account instead, and those matching funds will be taxable when withdrawn in retirement.

4. Self-Employed Retirement Plans

If you have any self-employment income (even from a side gig), you’ve got access to some powerful options:

SEP IRA:

• Contribution limit: Up to 25% of compensation, maximum $70,000 for 2025
• Simple to set up and maintain
• Flexible annual contributions (not required every year)

Solo 401(k):

• Dual contribution structure as both “employer” and “employee”
• “Employee” contribution: Up to $23,500 for 2025
• “Employer” contribution: Up to 25% of compensation
• Total limit: $70,000 for 2025
• Can include a Roth component for the employee portion
• Additional catch-up: $7,500 for those 50+ or $11,250 for ages 60-63

The Solo 401(k) often allows higher total contributions than a SEP IRA at the same income level, making it potentially more valuable for maximizing retirement savings.

Other Retirement Savings Options Worth Considering

Beyond IRAs, high-income earners should also consider these alternatives:

Health Savings Account (HSA)

An HSA offers triple tax advantages:

• Contributions are pre-tax
• Growth is tax-free
• Qualified withdrawals for medical expenses are tax-free

For 2025, you can contribute regardless of income level if you have a qualifying high-deductible health plan. HSAs can function as “health IRAs” for long-term investing, especially valuable in retirement when healthcare costs typically increase.

Brokerage Accounts

While not tax-advantaged like IRAs, brokerage accounts offer:

• No contribution limits
• Complete flexibility for withdrawals
• No required minimum distributions
• Potential for long-term capital gains tax rates (currently lower than ordinary income tax rates)

Real Estate Investments

Real estate can be an excellent diversification strategy for high-income earners:

• Potential for rental income and long-term appreciation
• Tax advantages through depreciation
• Opportunity to build equity while tenants pay down mortgages

Just remember, real estate is more hands-on than other investments. Only pursue this if you have genuine interest and have done your homework!

Choosing the Right Strategy For Your Situation

The best IRA approach for high-income earners depends on several factors:

1. Current tax bracket vs. expected retirement tax bracket

   • In higher brackets now? Traditional (tax-deferred) accounts might be better
   • Expect higher brackets in retirement? Prioritize Roth accounts

2. Existing IRA assets

   • Have significant pre-tax IRA balances? The backdoor Roth might be less attractive due to the pro-rata rule
   • No existing IRAs? The backdoor Roth is much more straightforward

3. Employment situation

   • Self-employed? SEP IRAs or Solo 401(k)s offer higher contribution limits
   • Employee with 401(k) access? Check if your plan allows after-tax contributions and in-plan Roth conversions

4. Time horizon

   • Longer timeline? Tax-free growth in Roth accounts becomes more valuable
   • Nearing retirement? Tax diversification becomes more important

My Personal Take

In my experience working with high-income clients, I’ve found that a combination approach usually works best. This might include:

1. Maxing out employer-sponsored plans first (especially if there’s a match)
2. Using the backdoor Roth IRA strategy if you don’t have existing IRA balances
3. Considering HSA contributions for triple-tax advantages
4. Adding taxable brokerage accounts for flexibility and tax diversification

The key is to not let income limits discourage you from retirement planning! With these strategies, even the highest earners can build substantial tax-advantaged retirement savings.

Frequently Asked Questions

Q: What is the income limit for contributing to a Roth IRA in 2025?

A: For 2025, single filers phase out between $150,000-$165,000 MAGI, and married filing jointly phase out between $236,000-$246,000 MAGI.

Q: Is a backdoor Roth IRA legal?

A: Yes, while the IRS hasn’t formally ruled on whether this strategy violates the “step-transaction rule,” it’s widely practiced and accepted. Still, it’s wise to consult with a tax professional.

Q: How do I report a backdoor Roth IRA on my taxes?

A: You’ll need to file Form 8606 to report your non-deductible Traditional IRA contribution and the subsequent conversion to a Roth IRA.

Q: Can I still use a backdoor Roth if I have existing IRA accounts?

A: Yes, but the pro-rata rule will apply, potentially making a portion of your conversion taxable. Consider rolling existing IRAs into a 401(k) first if your plan allows it.

Q: What’s better – a SEP IRA or Solo 401(k) for self-employed individuals?

A: A Solo 401(k) typically allows higher contributions at the same income level and offers a Roth option for the employee portion, making it often the better choice for maximizing retirement savings.

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Remember, while these strategies can help high-income earners maximize retirement savings, tax laws change frequently. It’s always best to consult with a qualified financial advisor or tax professional before implementing any new retirement strategy.

What strategies are you currently using for retirement as a high-income earner? I’d love to hear about your experience in the comments!