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
Navigate pension 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 one traditional IRA, while your contribution is not deductible. You can also create and contribute to a spousal IRA for your spouse. And while you 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 less than 4%, it may be worth forgoing extra payments and saving or investing that money instead. For example, high-yield savings accounts currently yield about 5%. Certificates of deposit (CDs) with a term of one year even pay up to 5.5% or more. Keep in mind that just because savings or investments aren't in a formal, tax-advantaged retirement account doesn't mean you can't use them to fund your retirement.
To consider speak to a financial advisor for more help with saving and planning for your retirement.
Contribute to a workplace plan and an IRA
Anyone can contribute to both a workplace 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're 50 or older) to an IRA for 2023. If neither you nor your spouse are covered by a workplace 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 about it.)
The deductibility you may have depends on your household income and tax return status:
Single persons or heads of families are covered by the workplace plan
If you are single or head of your household and have a workplace plan in 2023, IRA contributions are:
Married, filing a 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 a joint tax return and your partner has a workplace plan, but you do not
If you are married, filing jointly, and have a spouse with a workplace plan in 2023 (but you don't), the IRA contributions are:
Create and fund a spousal IRA
Generally, 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 one spouse IRA for the non-working spouse. A spousal IRA gives your family the opportunity to double their retirement savings.
Despite its name, a spousal IRA is no different from a regular IRA in the way it is set up or the tax benefits. 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 filing jointly” as your income tax filing status.
Same contribution limits for Roth IRAs and deductibility limits for traditional IRAs apply the same as they would for any retirement account. Traditional spousal IRAs are also eligible Roth Conversions. (And if you have more questions about spousal IRAs, Consider matching with a financial advisor.)
Is a Backdoor Roth IRA Right for You?
Roth IRAs have a few beneficial twists that make them desirable for many taxpayers. For starters, all withdrawals – including growth and earnings – are completely tax-free, as long as you follow the rules. You don't have to take for someone else required minimum distributions (RMDs) so your money has more time to grow.
Unfortunately, Roth IRA contributions are subject to income limits, which leaves many people out. Before 2023, single filers earning $153,000 or more and married filers earning jointly $228,000 or more cannot contribute to Roth IRAs.
That's where the backdoor Roth 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, talk to a financial advisor about it.)
The process is quite simple. If you don't already have a Roth account set up, 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.
Some other caveats to keep in mind:
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There is a special one pro rata tax rule requiring you to consider all of your traditional IRAs as a whole, both pre- and after-tax contributions, to determine how much tax you will owe on the conversion. You can't choose which IRA money to convert.
That said, the tax-free withdrawals in retirement can be well worth any complications.
In short
You can increase 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 income streams for your retirement by converting some of your retirement funds into Roth IRAs.
Tips for finding a financial advisor
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Finding one Financial Advisor doesn't have to be difficult. SmartAsset's free tool connects you with up to three vetted financial advisors serving your area, and you can have 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, start 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 can ask an advisor to ensure you make the right choice.
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 SmartAdvisor Match platform and she received compensation for this article.
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