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High-earning families often do everything right: they save, they invest, and they plan ahead. But many still bump into a frustrating limitation—income limits that prevent direct Roth IRA contributions.
In this episode of Well Balanced, Senior Wealth Advisor Mike Nesheim shares a story that highlights a potential solution for high earners: the backdoor Roth IRA.
The household: a physician and spouse were saving diligently, but their high income meant they couldn’t make Roth IRA contributions. They assumed that opportunity was simply off the table. It wasn’t. After reviewing their situation together, Mike showed them how a backdoor Roth IRA could be a powerful long-term planning strategy.
How the Strategy Works
When income is too high for a direct Roth IRA contribution, you may still be eligible to:
1. Make a nondeductible (after-tax) contribution to a traditional IRA.
2. Convert it to a Roth IRA, where future growth and qualified withdrawals are tax-free.
3. Repeat annually if it aligns with your household tax picture.
For this couple, the spouse—who wasn’t working full-time—was still eligible to contribute to an IRA because they filed jointly. That alone opened the door to decades of potential tax-free growth via Roth conversion.
A Word About Rules: The Pro Rata Rule
This isn’t a one-size-fits-all approach. The IRS looks at all your IRA balances when calculating how much of a conversion is taxable. This is known as the pro rata rule. If you only have after-tax IRA contributions with no pre-tax IRA balances, the conversion is generally tax-free. However, if you have pre-tax IRA balances, the conversion will be prorated.
It’s these nuances that make thoughtful planning and coordination with your advisor and tax professional essential.
Done thoughtfully, this strategy may be a meaningful lever in your long-term plan.
If you’re wondering whether a backdoor Roth IRA—or any type of Roth conversion—fits your household, connect with your Vector advisor. We’re here to help you explore your options thoughtfully and in the context of your broader plan.
And if this story resonates or reminds you of someone in your life, feel free to share it. Sometimes the right idea at the right time makes all the difference.
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All content discussed in our podcasts, videos, or related blog articles are for informational purposes and should not be construed as individualized financial advice.
Opinions expressed herein are solely those of Vector Wealth Management, our staff, and guests. Material presented is believed to be from reliable sources, however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed directly and in detail with your financial advisor prior to implementation of a strategy or investment. This podcast and related content are not intended to render personalized investment advice, nor should it be viewed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities or strategies discussed.
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