High earners may have a variety of options for saving for retirement—but income limits hateful that directly contributions to Roth IRAs may not be among them. This is unfortunate because Roth IRAs offer tax-costless earnings growth and withdrawals in retirement,1 making them a potentially valuable part of a broader investing and revenue enhancement-planning strategy. Having both Traditional and Roth accounts can help with tax diversification in retirement.

Here are some strategies to consider.

Are you getting the most from your 401(grand)south?

Maxing out contributions to a traditional 401(k) is a good identify to start. Such accounts have no income phase out limits, so y'all can more often than not contribute the lesser of your income or $19,500 (plus an additional $half dozen,500 if you lot are fifty or older). Pre-tax contributions to these accounts reduce your taxable income and earnings will abound on a tax deferred basis—though distributions in retirement are subject to be taxed at ordinary income rates in the hereafter.

If your employer besides offers access to a Roth 401(k), then you could consider using one to set aside some post-taxation retirement savings. Similar their traditional 401(k) counterparts, Roth 401(grand)south—unlike Roth IRAs—don't accept income stage out limits. And so even if you don't qualify for a Roth IRA because your income is in a higher place IRS income limits you can make after taxes contributions to a Roth 401(chiliad). Your earnings will grow tax-costless, and you pay no taxes when yous have withdrawals later 5 years and over the age of 59½.

It should be noted that the annual contribution limit applies across all of your 401(m) accounts, not on each business relationship individually. In 2021, contributions are capped at $19,500 between a Traditional and Roth 401(one thousand) and at $26,000 for those 50 and older.

Consider a Roth conversion

Converting some or all of the funds in a Traditional IRA into a Roth IRA is some other option. This would mean taking funds from traditional IRAs, paying ordinary income tax on those funds, and rolling them into a Roth IRA. This can make sense particularly if yous expect to be in a higher taxation bracket in the future and accept a long-time horizon.

Some advisors too see a so-chosen backdoor Roth IRA every bit another mode to secure the tax features provided by Roth accounts. It's a unique strategy but it could work for you lot. The backdoor Roth involves opening a Traditional IRA, making non-deductible contributions to it, and rolling over those funds to a Roth IRA at a later date. When those funds are rolled over, you'll have to pay taxes on any appreciation that occurred prior to the conversion, in improver, the pro-rata dominion may too utilize. However, once in the Roth IRA, the savings are eligible to grow and be distributed revenue enhancement free.

See The Backdoor Roth—Is Information technology Right for You? for more details.

What about non-deductible IRAs?

Does it ever make sense to contribute to a Traditional IRA even if y'all can't deduct the contributions? At the very to the lowest degree, you could still savor the potential for tax-deferred growth in the account.

"Think carefully earlier considering this option," Rob Williams, vice president of financial planning at the Schwab Centre for Financial Inquiry, says. "Yous wouldn't be getting any upfront tax break, and hereafter withdrawal of growth on your original contribution would exist taxed at your ordinary income taxation charge per unit."

It's possible that the future revenue enhancement rates yous'd pay would be higher than what you would owe if you'd invested in a tax-efficient way in a regular taxable brokerage business relationship. "With today'due south low long-term capital gains and qualified dividend rates, non-deductible contributions to a traditional IRA may make less sense," says Rob.

Every bit of 2021, long-term capital letter gains are taxed at a federal rate of either:

  • 0% for single filers with taxable income up to $twoscore,400 or joint filers with taxable income up to $80,800.
  • 15% for single filers with taxable income betwixt $40,401-$445,850 or joint filers with taxable income betwixt $80,801-$501,600.
  • 20% for single filers with taxable income above $445,850 or joint filers with taxable income above $501,600.

In addition, single filer with adjusted gross income (AGI) over $200,000 or joint filers with AGI over $250,000 may have to pay the Medicare surtax of 3.8%.

Tax-efficient investing in a taxable account

There are many tax-efficient means to invest in taxable accounts. If you don't trade often, individual stocks, as well as most exchange-traded funds (ETFs) and index common funds, tin outcome in a lower taxation bill.

Yous may owe just the long-term capital gains tax rate on earnings if you sell an investment held longer than a year at a gain, which is generally lower than the tax rates on ordinary income. There may be some distributions forth the mode, but qualified dividends from stocks are by and large taxed at the long-term capital gain tax rate, and ETFs and index funds can be managed revenue enhancement-efficiently.

Having some money in taxable accounts can provide opportunities to reduce your taxation nib past strategically harvesting losses. That's non something you tin do in your 401(m) or any IRA. Investing in tax-advantaged municipal bonds or muni bail funds, depending on your tax subclass, can help as well.

Saving in a taxable business relationship tin can too be helpful for estate planning goals. If y'all hold long-term investments in a traditional brokerage account, you can donate low-toll-basis securities to charity for a full fair market value deduction and no capital gains tax. You can likewise exit your appreciated shares to heirs who would receive a step-upwards in cost basis.

Finally, equally noted above, having money in taxable accounts as well as tax-advantaged accounts tin give you greater flexibility and access to savings for needs prior to age 59½—the minimum age from which you tin withdraw from traditional IRAs and retirement accounts without a 10% early withdrawal penalty.2 It can also provide flexibility in managing your tax bracket as you plan for post-retirement greenbacks flows. "This sort of revenue enhancement diversification can be helpful, no matter your future revenue enhancement rate," says Rob.

oneYou lot must be 59 ½ and held the Roth IRA for 5 years earlier tax-gratuitous withdrawals on earnings are permitted.

2Subject to certain exceptions, for hardship or other situations specified by the IRS.

What you can do adjacent

  • As you're preparing your taxes, make up one's mind whether you lot'll be eligible to brand a Roth IRA contribution. If y'all're not, consider contributions into a Roth 401(k), if your workplace offers it, Roth conversions, or saving in a taxable business relationship.

  • For the current revenue enhancement year, see if your 401(k) plan will allow yous to make post-taxation contributions.

  • Consider investing tax efficiently in a brokerage account and read more about tax-smart approaches to investing