Roth Strategies for High Earners

Roth accounts are one of the most powerful tools in a high earner's financial arsenal — but there's more than one way to get money into them, and the right strategy depends entirely on your situation. In this episode, Carla breaks down four Roth strategies from the ground up: the backdoor Roth IRA, Roth 401(k) contributions, the mega backdoor Roth, and plain old Roth conversions.

She covers who each strategy is for, when it makes sense, and just as importantly — what can go wrong. You'll learn why HENRYs are often shut out of direct Roth IRA contributions, how the pro-rata rule can silently derail a backdoor Roth, why switching from traditional to Roth 401(k) contributions will shrink your take-home pay (and how to plan for it), and how the mega backdoor Roth can be a game-changer for high savers whose plans allow it.

Carla also gets into Roth conversions — often misunderstood as something you do right now, when in reality they're frequently most powerful in the years between retirement and RMD age, when your tax bracket temporarily dips.

Whether you're just getting started with retirement accounts or wondering if you're leaving tax-free growth on the table, this episode gives you the full picture.

As always, the right Roth strategy is deeply personal — Carla recommends working with a financial advisor who knows your complete financial picture before implementing any of these.

Transcript

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On today's episode, I'm going to be talking about all of those Roth strategies that are out there. So I'm going to go through each strategy and talk about when it might make sense for you. Now, please understand that there's a lot of complexity that goes into which Roth strategies make sense for you and when. So I'll go through some generalizations and I highly recommend speaking to your financial advisor who knows the ins and outs of your unique financial situation before implementing them or before choosing which one makes sense for you over the others. So I'm going to talk about the following strategies: the very famous backdoor Roth IRA, Roth 401k contributions, mega backdoor Roths, and also just plain old Roth conversions. Now, just to make sure we're all on the same page, let's talk about what Roth even actually means. So there are two main types of Roth accounts: Roth IRAs and Roth 401ks or 403Bs. So individual retirement accounts can be Roth's, as well as employer-sponsored retirement accounts. So it is a retirement account. Money that goes into these accounts is after tax money. The money grows tax-free. And when you take the money out in retirement, you do not have to pay taxes on that money. Okay. This is essentially the opposite of traditional retirement assets, where you get a tax deduction in the year that you make the contribution. The money grows tax free. But then when you take the money out in retirement, every single dollar that you take out gets taxed at your marginal tax rate. So Roths can be a really powerful strategy. And, you know, traditional financial advice says that you always want to do, quote, traditional retirement contributions while you're working, because you're going to be in a higher tax bracket, of course, in your working years, or presumably than when you're retired. So get the tax deduction now at say, let's say you're in the 32% tax bracket. Get a tax deduction at 32% for the money that goes into your traditional accounts. And then assuming you're in a lower tax bracket in retirement, let's say maybe the 22% tax bracket, you take that out, that money's taxed at 22% instead of that 32% when you were in that 32% tax bracket. So yes, that is true. But especially for you, Henries, out there that are in your 30s and 40s, we have a long time until we can be touching our retirement account money. You cannot take the money out for the most part. There are some exceptions. You cannot take money out of retirement accounts prior to age 59 and a half, or you will be penalized. Again, yes, there are exceptions to this, but for the most part, this money needs to stay in the retirement accounts until you are 59 and a half. And so I have a lot of thoughts about where taxes may be going in the future, whether, you know, you may be technically in a lower tax bracket in retirement, but are all tax brackets when we're in our 60s and older going to be higher actual percentages than they are now. Having Roth assets also allows you for a lot of flexibility. So say you are in retirement and you're taking out, you know, roughly the same amount each year to live off of, but maybe one year you want to take out a very large amount. I don't know, say you want to buy a second home or you want to gift a large amount of money for your children, or you know, you're paying for a wedding, if you can get pushed up into a higher tax bracket if all of the money that you have is in traditional accounts. So having Roth assets provides a great hedge against tax inflation. And it also provides for a lot of flexibility in retirement. And then also some of these strategies that we're going to talk about, if the circumstances are right, it can be really a no-brainer because you can only put so much into traditional retirement accounts. There are a couple ways around that with Roths. And so if you're earning a lot of money and saving a lot of money and you've maxed out your traditional 401k and you're wondering, okay, do I do a mega backdoor Roth or a backdoor Roth? Or do I just take this extra money and invest it in a taxable investment account where the dividends and interest are going to be taxed every single year? And when I sell any positions, I'm gonna have to pay capital gains tax versus putting it in a Roth shelter where you're never going to have to pay taxes on it. If everything sort of aligns, it can be sort of a no-brainer if it's, hey, put this money in a taxable investment account or put it in a tax-free vehicle. Okay, so, anyways, let's go ahead and get into it. Let's start with the backdoor Roth IRA, because this is the one that I get asked about a lot, and I really love it. I do it myself for me and my husband every year. So, first off, for lower earners, which should not be any of you guys listening, you guys listening are high earners, you can just make a regular direct Roth IRA contribution. But you can only do so if your modified adjusted gross income, if you're single, is less than $168,000 a year, or if you are married filing jointly, if your modified adjusted gross income is less than $252,000 per year. So a lot of you are making too much money to contribute directly to Roth IRA accounts. And ironically, the other part is that you also make too much money to get a tax deduction for contributing to traditional IRA accounts. So if you are single, if you make more than $81,000, you cannot get a tax deduction for contributing to a traditional IRA. If you are married filing joint and you make more than $149,000, then you cannot get a tax deduction for contributing to a traditional IRA. Now these are 2026 numbers. The numbers increase typically a little bit each calendar year. So you can take advantage of this wonderful loophole called the backdoor Roth. What you do is you make a non-deductible contribution to a traditional IRA. And then once the money has landed in there, you do what's called a Roth conversion and you move the money from the traditional IRA into the Roth IRA. And because you did not get a tax deduction for your contribution to the traditional IRA, the Roth conversion piece where you move the money from the traditional IRA into the Roth IRA is not taxable. So it's just this roundabout way of getting money into your Roth IRA. The big caveat is that you cannot have any traditional IRA assets, or this does not work in a tax-free way. And this is because of what is called the pro-rata rule. So let's say you have $100,000 in a traditional IRA, and this includes inherited traditional IRAs, traditional SEP IRAs, traditional simple IRAs, any type of IRA. 401ks do not count. So you can have a million dollars in your traditional 401k and still do a tax-free backdoor Roth. If you have, let's say, $100,000 in your traditional IRA, you make a $7,500 non-deductible contribution, which is the per person maximum for 2026. And then you want to convert, say, just that $7,500. The IRS says, no, no, you cannot convert just that $7,500 that you contributed this year. You are converting $7,500 of now $107,500. And so the vast majority of the conversion that you do is going to be subject to taxes. Now, one really important thing to note is that it does not matter if you open a brand new traditional IRA account that has a zero balance. And I have had someone tell me that, oh gosh, their financial advisor told them that they could do this. That is not true. The IRS looks at all of your traditional IRA assets. And this is just, you know, in your name. So if you're married and your spouse has traditional IRA assets and you do not, you can definitely do this backdoor Roth totally tax-free. The other big mistake I see is people contributing to the traditional IRA and forgetting to do the conversion part. And maybe they invest the money in the traditional IRA and the money grows and then they convert. If you do that, any of the growth gets taxed when you do the conversion. So let's say you contribute $7,500 to the traditional IRA. You invest it, it grows to say $10,000. And then you realize, oh shoot, I invested it before I did the conversion. Well, you can still convert it, but that $2,500 of growth is going to be taxable in the year that you do the conversion. And the other mistake that I see, which just breaks my heart, is people go through all of these steps. They open the traditional IRA account, they open the Roth account, they make the non-deductible contribution to the traditional IRA, they do the Roth conversion, and then they don't invest the money and they just let it sit there for years and years when that money could have been growing tax-free. So this is not like a 401k where the money is always invested. You have to go in and invest that money or have an advisor who is investing that money for you, or you're really missing out on a huge opportunity. Now, $7,500 per year into a Roth account may seem small, but if you do it year after year after year, especially if you have a spouse who's doing it too, and that money is getting invested and growing, then that can become really, really powerful. Love backdoor Roths. Now, who would be a candidate for a backdoor Roth? Again, just general observations would be of course, you do not have traditional IRA assets. You are putting enough in your 401 to at least get your full employer match. So we want to get free money when we can. So you want to make sure that before you're focusing on doing the backdoor Roth, you are able to save enough of your money to be contributing to your 401 to get that full employer match. You are going to be someone who has their full emergency fund built up, sitting in high yield savings, money market, somewhere safe. We do not want to drain our emergency fund to build up our backdoor Roth. And again, just overall having a strong financial fortress, you can listen to my financial fortress episode, episode five, where we want to make sure that we have enough funds to cover all of our short-term needs in case of a job loss before we really think about implementing these types of Roth sets. Now, I do have one really great trick for those of you who would love to do a backdoor Roth, but you have traditional IRA sets. Well, one possible thing is if it's a small traditional IRA, you could just bite the bullet, do the taxable Roth conversion, pay the taxes, and then going forward, you can do the backdoor Roth. But another great tactic would be if you are currently employed and have a 401k or 403B, you are very likely going to be able to roll your traditional IRA assets into your 401k or 403B. It depends on your company's specific 401k plan, but pretty much every 401 plan that I've come across loves to accept new money and will allow you to roll your traditional IRA assets into your 401. This does not work if you have an inherited traditional IRA. So that is a great workaround. Before you roll more assets into your company's 401k, be sure that that 401k plan has great investment options with low fees and that the overall plan has low administrative fees. And I think this is a great point. Now transition into 401k Roth opportunities. So the first thing that you can do with a 401 is you can consider doing some or all of your 401 contributions as Roth. Just about every 401k and 403B plan out there these days allows for Roth contributions. It is not a guarantee. It depends on your specific company's 401. But, you know, when I started in this industry 18 years ago, very few 401 plans allowed for Roth contributions now in 2026. Most plans do. So the maximum for those of you under age 50 that you can contribute to your 401k is $24,500 a year in 2026. That can be all traditional, that can be all Roth, it can be part Roth and part traditional. So when is a good time to do some or all Roth? A good time to maybe do some or all Roth is if you are in an unusually low tax bracket in a current year. Because again, if you're normally saying in the 35% tax bracket and this year for whatever reason you're in the 22% tax bracket, let's get some more money into that Roth, into this tax shelter. And yeah, it's okay if we're missing out on a little bit of a tax deduction because it's probably going to be worth it to get more money into the Roth when you're paying at a lower federal tax rate. Now, why would you be in a lower income tax bracket this year? Maybe you're unemployed part of the year. Maybe you are a business owner like I am. So maybe you're experiencing just an unusually low income year, or maybe a lot of your income is bonuses and you know, you all know if and when you might have some lower income years. So that could certainly be a good opportunity to do that. I mean that's all relative. Certainly if you have like a million or more in your 401k, all traditional, it might be a good opportunity to start thinking about whether or not a Roth makes sense. Even if you are in a high tax bracket, again, this is going to be very individualized to your own financial situation. But if you think about it, contributing $24,000 into a 401k, if it's Roth money, that is worth a heck of a lot more than $24,500 of pre-tax money. So you are effectively putting more money into your 401k if you are doing Roth. And again, I really like my clients to have a mix of traditional and Roth assets. So if you're kind of underweight in Roth, it might be a good time to consider doing more or all Roth 401 contributions. Please note if you are putting in, say, let's say you're putting 10% into your 401k and it is all traditional contributions, and you decide you want to switch and you're going to contribute 10% to your Roth 401k. Please be aware your take-home pay is going to be a lot smaller because they are taking taxes out for every dollar that goes into your Roth 401k when before you were getting that tax deduction. So depending on your cash flow, you might need to do it slowly over time. Maybe switch from 10% traditional to, I don't know, 7% Roth and see what your cash flow is like. There are also a lot of online calculators. ADP has a great take-home pay calculator where you can put in the numbers, see what your take home pay would be. But just beware that when you switch from traditional to Roth, your take home pay is going to be smaller because more taxes are coming out of that paycheck. Okay. And now let's move on to the mega backdoor Roth. So this is something within a 401k plan. And I will say, again, your company's specific 401k plan has to allow for it. I do not know exact statistics on this, but just from what I've observed talking to clients, my guess would be about 20% of 401 plans allow for mega backdoor Roths. Certainly, I believe, don't quote me on this. If you work for any of those big tech companies, Amazon, Google, Apple, I believe that you do have the ability to do a mega backdoor Roth. If you're not sure, you need to either ask HR or look on your 401 website. Number one, does your plan allow for, quote, after tax contributions? These are non-roth after-tax contributions. And number two, does your plan allow for in-plan conversions? Okay. If those things say yes, then you are able to do the mega backdoor Roth. Now, what is this? So, as I was saying, if you are under the age of 50, the maximum amount that you can contribute to your 401k in 2026 is $24,500 with a giant caveat. So the real limit to contribute to your 401k is actually $70,000. And that is the real limit between employer and employee contributions combined. So usually there is room in there for you to max out your 401k, for your employer to do whatever match that they do, and then for you to still have room to get to that $70,000 true 401k max per year. What you would do is you would figure out how much you want to do in your mega backdoor Roth. And it might just be a calculation of how much room do you have left in that $70,000 cap and do an after-tax contribution in addition to whether you're doing traditional and or Roth contributions towards that $24,500 a year. Okay. And then you are doing in-plan conversions. So this is very similar to the backdoor Roth IRA. You are making a non-tax-deductible contribution to a retirement account. And then you need to convert it to be actual Roth assets so that it continues to grow tax-free. So this is a two-step process. Again, making non-Roth after-tax contributions to your 401k and then doing an in-plan conversion to turn those non-deductible after-tax assets actually into Roth assets. And this can be extremely powerful because you can just get so much money into Roth accounts, which is really cool. And this again is a situation where if you are making a lot of money and doing a good job living well within your means, and you are saving a lot of money, it's really a question of hey, do I take this chunk of money and put it into a Roth vehicle via the mega backdoor Roth? Or do I invest the money in a taxable account where I'm going to experience that tax drag because I'm going to have to pay taxes on dividends and interest that pay out every single year? Now again, going back to that whole financial fortress, we do not want to drain every single source of money that you have outside of retirement accounts. So making sure that you have a strong financial fortress that you are definitely able to save beyond that $24,500. You know, it doesn't make sense to be doing a mega backdoor Roth if you're not first maxing out your 401k to begin with. And, you know, there's a really interesting strategy here too that can be a bit of a mind bend for some people. So I have talked to at least one client, I think two or three actually, where they have a large amount of Money like high six figures in a taxable account because they inherited money or were gifted money from you know their parents or grandparents or whatever the reason. And normally within their normal cash flow, they would not have enough money to be able to do the mega backdoor Roth, max out their 401k, and have enough money come home in their paycheck every month to cover all of their expenses. But this is a unique opportunity to indirectly move some of that money from their taxable brokerage account into this Roth vehicle via the mega backdoor Roth. And I understand not everyone's comfortable with it. But let's just say, you know, you're gonna do $1,000 a month into the Mega Backdoor Roth. And with taxes coming out, that's going to lower your take home pay by more than $1,000 a month. And you really needed, you know, that, let's say, $1,300 a month to cover your budget. Well, what you would do is you would put that $1,000 or so a month into your mega backdoor Roth and simply withdraw $1,300 a month from your taxable account. And again, it can be weird and uncomfortable to feel like you are, quote, not living within your means. But if if you can wrap your mind around it and be comfortable with it, it can be a really cool way to indirectly move taxable investment into this tax-free Roth vehicle. Again, we don't want to do this if it's going to drain every dollar that you have outside of retirement accounts. But if you are in that sort of situation where you have a lot of money in a taxable investment account, it's something you might want to consider. Okay, and now what we've got left is just plain old Roth conversions. What is this? This is just taking, say, you have a traditional IRA and you want that to be Roth money. Then you are going to just move money from your traditional IRA into a Roth account, and any amount that you do is going to be taxable in the year that you do this conversion. Oh, very important note when doing Roth conversions, do not withhold taxes on the conversion. So if you're at, say, Fidelity and you're moving money from your traditional IRA into your Roth IRA, they will say, would you like to withhold taxes? Definitely say no, because that is going to come out of the money that you are converting, which means less money going into your Roth IRA. I also do believe that that would count as an IRA withdrawal, which is itself taxed and penalized if you are under the age of 59 and a half. So we always want to be paying Roth conversion taxes with money outside of our retirement accounts. So doing Roth conversions would certainly require you having enough money outside of your retirement accounts to pay those taxes and make sure that you let your tax account know you might need to make an estimated tax payment so that the taxes on this conversion are covered. Now, just to note, you do not need to convert an entire account. Okay, let's say you have $500,000 in a traditional IRA. It is not an all or nothing thing. You can convert $10,000 of it. You can convert $50,000, any amount from zero to 100% of the account in any given tax year, but the full amount of the conversion is going to be taxable. When would you do this? Well, most of you probably would not be doing this anytime soon. When it usually makes sense for my clients is between retirement and RMD age, the age at which you have to start taking your required minimum distributions, which is going to be somewhere between age 73 and age 75, depending on when you were born. This is a great opportunity if and when you are in a lower than normal tax bracket to take a little bit of a tax hit, paying taxes at a lower rate than you expect to pay later. So again, let's say you're in the 37% tax bracket as you're earning a lot of money, then you retire, or I don't know, you take a lower-paying job, or you take a sabbatical and now you're in, you're in the 12% tax bracket. You know that later on when you start taking money out of your traditional retirement accounts, you're going to be in a higher tax bracket again, maybe back in the 37% tax bracket, or maybe in the 32% tax bracket, whatever it is. So you can strategically move money from your traditional IRA into your Roth IRA and pay the taxes at a lower rate. So I usually do this with clients very strategically, coordinating with their tax accountant. Okay, if we move this much from the traditional to the Roth this year, perfect. That's going to max out whatever tax bracket we are targeting to max out. So we do it very purposefully and not willy-nilly with the idea of saving on federal and state taxes in the future, when we even when we expect our marginal tax bracket to be higher. So again, this can be a really great strategy to do between the years of retirement and your RMD age. And again, especially if it's before you start taking social security, which you can start at any time between age 62 and 70. So if you retire at, say, 60 and you're not going to take social security until age 70, there's 10 years that you can really take a lot and convert slowly each year to strategically max out lower tax brackets. And then, you know, you may have another couple of years after you start Social Security where you might want to do smaller Roth conversions, but still potentially meaningful. And I'll tell you, I do these with my mom. She is RMD age, and we're still regularly doing Roth conversions, a smaller amount since she does have an RMD and take social security at this point for my mom. And what I do with older clients is it really becomes much more of a legacy planning strategy that my mother is kindly saying, hey, I'm going to convert my traditional IRA money over time into a Roth Pay taxes because I know that I'm in a lower tax bracket than you and your sister will likely be in when you inherit my traditional IRA, hopefully many, many years from now. And we have to start taking money out each year. But it doesn't need to have to happen necessarily when you retire. Again, if you are in an unusually low income year because you're unemployed or taking a sabbatical or whatever the situation is, if you know you're going to be in an unusually low tax year, you might want to consider Roth conversion strategies. So there you have it. We have our backdoor Roths, we have Roth 401k contributions, we have mega backdoor Roths, and then we have just plain old Roth conversions. I am a big fan of Roths, but it has to be done thoughtfully and strategically to work well.