Income too High for Roth Contributions? Not so Fast my Friend!

Clay Wood |

Roth accounts are a great addition to your retirement savings. You put in after-tax dollars and it grows tax-free, which is such a beneficial to supplement your retirement income. By using Roth money, many times in retirement you can help keep yourself in a lower tax bracket, minimizing taxes.
Some find themselves in a situation where they can no longer contribute to a Roth IRA. For 2019, an individual with a modified adjusted gross income over $137,000 ($203,000 filing jointly) is phased out and does not qualify for Roth contributions.
People tend to think that once they are over the MAGI limit that they have no other options to get the tax-free growth they receive with a Roth account. Not so fast my friend!
Many of you may still have access to Roth savings through your 401(k). The Roth 401(k) option works the same way your normal 401(k) contributions do except instead of deferring taxes until retirement you pay taxes today. Unlike a Roth IRA there are no income limitations for contributions. In addition, you can save more! Roth IRAs only allow for a $6,000 contribution ($7,000 if you are over age 50). With a Roth 401(k), you can contribute up to $19,000 ($25,000 if you are over age 50).
If you are fortunate enough to have a 401(k) that matches a portion of your contribution, the match will be in pre-tax dollars. So, if you decide the Roth 401(k) option is right for you, you may still have a balance of some pre-tax money. In most plans you can do a combination of Roth 401(k) contributions as well as pre-tax contributions, so you can enjoy the best of both worlds.
It is important to note that when you select the Roth 401(k) option that you are giving up the tax deductibility that comes with the normal pre-tax contributions, just like a Roth IRA vs a Traditional IRA. If you are in a year that you expecting more income than normal or expect that you will owe taxes and need the deduction for your contributions, then you may want reconsider.
Roth money is great to have in retirement. If you are trying to increase the amount you have saved in a Roth account, the Roth 401(k) option may be right for you.

- Clay Wood