I am 48 years old. I made $310,000 last year and currently have $546,000 in my company pension plan. My husband is disabled, does not work, and does not have a 401(k) plan. I wanted to open a Roth IRA but read that I make too much money. What options do I have to save more money for retirement? I’m debt-free except for my mortgage, which I’m trying to get rid of 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, and can make it seem more difficult to save as much as you want. You already have a solid foundation to build on and more options than you may realize for growing your savings.
Even if you have a workplace plan, you can still contribute to a traditional IRA, although your contribution would not be deductible. You can also create and contribute to a spousal IRA for your husband. And while you make too much money to donate directly to a Roth IRA, you may be able to donate through a backdoor Roth IRA.
If your interest rate on your mortgage is below 4%, it might be worth not making any extra payments and instead either saving or investing the money. High-interest savings accounts, for example, currently generate a return of around 5%. One-year certificates of deposit (CDs) even pay up to 5.5% or more. Remember: Just because savings or investments aren’t in a formal tax-deferred retirement account doesn’t mean you can’t use them to fund your retirement.
Consider speaking to a financial advisor for further help saving and planning for 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 company pension plan, your contributions are deductible.
However, if you or your spouse have a workplace retirement plan such as a 401(k), this contribution may be only partially deductible or not deductible at all. Even if you don’t qualify for a current tax deduction for your contribution, you will still receive tax-deferred growth in the account. The growth and earnings are taxed when you make withdrawals in retirement.
Another plus: If you have money in the IRA, you have the option of converting it to a Roth IRA. (And if you need help planning your Roth conversion, discuss it with a financial advisor.)
The possible deductibility 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 workplace plan in 2023, the IRA contributions will be:
Married, filed jointly and you have a workplace plan
If you are married, filing jointly, and have a workplace plan in 2023, the IRA contributions will be:
Married, filing jointly, and your spouse has a workplace plan but you don’t
If you are married, filing jointly, and have a spouse with a workplace plan in 2023 (but this is not the case), the IRA contributions will be:
Create and fund a spousal IRA
Generally, you must earn income to contribute to an IRA. The exception is if your spouse 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 opportunity to double their retirement savings.
Despite its name, a spousal IRA is no different than a regular IRA in its setup and 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 return status.
The same contribution limits for Roth IRAs and deduction limits for traditional IRAs apply as for any retirement account. Traditional spousal IRAs are also eligible for Roth conversions. (And if you have additional questions about spousal IRAs, consider contacting a financial advisor.)
Is a Backdoor Roth IRA Right for You?
Roth IRAs come with several beneficial aspects that make them attractive to many taxpayers. For one thing, all withdrawals – including growth and profits – are completely tax-free as long as you follow the rules. Second, you don’t have to take required minimum distributions (RMDs), giving your money more time to grow.
Unfortunately, Roth IRA contributions are subject to income limits, so many people are excluded. For 2023, single filers earning $153,000 or more and married joint filers earning $228,000 or more cannot contribute to Roth IRAs.
This is where the Roth back door comes into play. This conversion process offers higher earners the opportunity to convert money remaining in their traditional IRAs into Roth IRAs. (And if you need help setting up a backdoor Roth, discuss the matter with a financial advisor.)
The process is pretty simple. If you don’t have a Roth account set up yet, 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 administrator takes care of the rest.
Some other caveats to keep in mind:
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There is a special pro rata tax rule that says you must look at all of your traditional IRAs as a whole, both pre-tax and after-tax contributions, to determine how much tax you will owe on the conversion. You don’t get to choose which IRA money you want to convert.
However, tax-free withdrawals in retirement can definitely make up for any potential complications.
Bottom line
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 retirement income streams by converting a portion 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 connects you with up to three verified financial advisors working in your region, and you can have a free discovery call with your matching 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 is important that you find someone you trust to manage your money. As you weigh your options, consider asking an advisor these questions to ensure you are making the right choice.
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Michele Cagan, CPA, is a financial planning columnist at SmartAsset and answers reader questions about personal finance and tax topics. Do you have a question you would like answered? Email [email protected] and your question may be answered in a future column.
Please note that Michele is not a participant in the SmartAdvisor Match platform and has received compensation for this article.
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