Nine Alternatives to Roth IRA for High-Income Earners
April 12, 2024
Nine Alternatives to Roth IRA for High-Income Earners
Hey there, welcome back to the Functional Retirement Podcast! Today, we're diving into a topic that many high-income earners face: where to put your cash if you make too much money for a Roth IRA. Let's explore nine alternative options to consider when you find yourself in this situation.
Exploring the Alternatives
Let's start by assuming you have a substantial income, likely exceeding $230,000 to $240,000 in the household, making you ineligible for a direct Roth IRA contribution. Additionally, let's assume you already have an investment strategy in place and are focused on generating future tax-free income. Given these circumstances, it's crucial to consider where to allocate your excess cash to achieve tax deferral or future tax-free income.
Roth Conversions: This strategy involves converting pre-tax dollars from an IRA or 401k into a Roth IRA by paying taxes on the converted amount. This method allows you to increase your Roth IRA holdings and potentially reduce future tax liabilities.
Backdoor Roth Conversion: By contributing non-deductible funds to an IRA and converting them to a Roth IRA, you can circumvent income limits. However, be mindful of aggregation rules that may impact the tax implications of this strategy.
Non-Deductible IRA Contributions: Even if you cannot contribute directly to a Roth IRA, making non-deductible IRA contributions can provide tax-deferred growth potential over time.
Taxable Brokerage Account: Consider investing excess cash in a taxable brokerage account for flexibility and control over your investments without the restrictions of retirement accounts.
401k: Maximize contributions to a Roth 401k, which offers similar tax advantages to a Roth IRA, or explore the mega backdoor option if your plan allows after-tax contributions.
Life Insurance: Utilize cash value life insurance as a long-term investment option, particularly suitable for high-income earners seeking asset protection and potential growth benefits.
Annuities: While offering tax-deferral benefits, annuities may not be ideal for growth compared to other investment options due to potential tax implications.
Pay Off Mortgage: Consider paying off your mortgage early to enhance cash flow and streamline retirement income planning, especially if you have low-interest rates.
Real Estate Investments: Diversify your portfolio by investing in real estate, either through rental properties or property ownership, to generate additional income streams.
When deciding which option to pursue, comprehensive financial planning is essential. Customized planning helps determine the most suitable strategies based on your financial goals, current situation, and long-term objectives. Remember, the key is not just choosing an option but integrating it effectively into your overall financial plan. Feel free to reach out for further guidance or clarification. Thank you for listening, and don't forget to like and subscribe for more insightful content. See you next time!
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