I am 48 years old. I made $310,000 last year and currently have $546,000 in my retirement plan at work. My husband is disabled, does not work and does not have a 401(k) plan. I wanted to open a Roth IRA, but I read that I make too much money. What options do I have to save more money for my retirement? I am debt free except for my mortgage, which I am trying to pay off in the next two years before my daughter goes to college. What would you advise?
– Nilda
Navigating retirement account rules can be confusing and frustrating, making it seem harder to save as much as you want. You already have a solid foundation to build on and more options than you may realize to grow your savings.
Even if you have a workplace plan, you can still contribute to a traditional IRA, although your contribution will not be deductible. You can also create a spousal IRA for your spouse and contribute to it. And even though you may make too much money to contribute directly to a Roth IRA, you may be able to contribute through a backdoor Roth IRA.
As for your mortgage, if your interest rate is below 4%, it may be worth it to forgo making extra payments and instead save or invest that money. For example, high-yield savings accounts currently yield around 5%. One-year certificates of deposit (CDs) yield as much as 5.5% or more. Remember, just because your savings or investments aren’t in a tax-advantaged retirement account doesn’t mean you can’t use them to fund your retirement.
Consider talking to a financial advisor for more help saving and planning for your retirement.
Contribute to a workplace plan and an IRA
Anyone can contribute to both a company pension plan and a traditional IRA, but your contribution may not be deductible depending on your income.
You can contribute up to $6,500 ($7,500 if you are 50 or older) to an IRA for 2023. If neither you nor your spouse is part of an employer retirement plan, your contributions are deductible.
However, if you or your spouse have a workplace retirement plan, such as a 401(k), that contribution may be only partially deductible or completely non-deductible. Even if you can’t get a current tax deduction for your contribution, you’ll still get tax-deferred growth in the account. The growth and income are taxed when you retire.
Another plus: If you have money in the IRA, you have the option to convert it to a Roth IRA. (And if you need help planning your Roth conversion, talk to a financial advisor.)
The deductibility you may have depends on your household income and your filing status:
Single person or head of household covered by the workplace plan
If you are single or the head of your household and have a company pension plan in 2023, the IRA contributions are:
Married, joint tax return and you have a workplace plan
If you are married, filing jointly and have a workplace plan in 2023, the IRA contributions are:
Married, filing jointly and your partner has a workplace plan, but you do not
If you are married, filing jointly, and have a spouse with a company pension plan in 2023 (but you do not), the IRA contributions will be:
Create and fund a Spousal IRA
In general, you must be earning income to contribute to an IRA. The exception is if you have a spouse who works and earns enough to cover two IRA contributions. You can open a spousal IRA for the non-working spouse. A spousal IRA gives your family the chance to double down on retirement savings.
Despite the name, a spousal IRA is no different than a regular IRA in how it’s set up or what the tax benefits are. It is also not a joint account. Only the non-working spouse owns this IRA. However, to qualify for a spousal IRA, you must use “married and filing jointly” as your income tax filing status.
The same contribution limits for Roth IRAs and deduction limits for traditional IRAs apply as they do for any retirement account. Traditional spousal IRAs are also eligible for Roth conversions. (And if you have more questions about spousal IRAs, consider consulting a financial advisor.)
Is a Backdoor Roth IRA Right for You?
Roth IRAs have a few favorable features that make them attractive to many taxpayers. First, all withdrawals, including growth and earnings, are completely tax-free as long as you follow the rules. Second, you don’t have to take required minimum distributions (RMDs), so your money has more time to grow.
Unfortunately, Roth IRA contributions are subject to income limits, leaving many people out. For 2023, single filers earning $153,000 or more and married filers earning $228,000 or more jointly cannot contribute to Roth IRAs.
That’s where the Roth backdoor comes into play. This conversion process allows higher income earners to move money held in their traditional IRAs into Roth IRAs. (And if you need help setting up a backdoor Roth, discuss it with a financial advisor.)
The process is quite simple. If you don’t already have a Roth account, create one. You tell your IRA administrator that you want to convert all or part of your traditional IRA to a Roth IRA. You fill out some paperwork and the manager takes care of the rest.
A few more points of attention:
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There is a special pro rata tax rule that requires you to consider all of your traditional IRAs as a whole, both pre-tax and after-tax contributions, to determine how much tax you owe on the conversion. You cannot pick and choose which IRA money to convert.
That said, the tax-free withdrawals during your retirement may be worth any potential complications.
Conclusion
You can grow your retirement savings by contributing to an IRA and a spousal IRA, even if you have a workplace plan. You can also create tax-free retirement income streams by converting some of your retirement funds into Roth IRAs.
Tips for finding a financial advisor
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Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can schedule a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Consider a few advisors before choosing one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
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Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid—in an account that isn’t subject to big swings like the stock market. The tradeoff is that the value of liquid assets can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
Photo credits: ©iStock.com/Moyo Studio, ©iStock.com/LaylaBird
Michele Cagan, CPA, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Michele is not a participant in the SmartAsset AMP platform, nor an employee of SmartAsset, and she received compensation for this article.
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