Funding a Roth When Income is too High to Contribute

From Bob Jennings at TaxSpeaker. Check out TaxSpeaker at taxspeaker.com

The 2025 maximum Roth contribution is $7,000, plus an over age 49 catch-up of $1,000. However, the taxpayer must have earned income of at least the amount contributed and the taxpayer’s total adjusted gross income must be less than roughly $150k single and $236k joint.

A. Convert an existing pre-tax IRA (or other retirement account) to a Roth.

There is no dollar limit on this idea, but the entire amount converted will be taxed but not penalized. This tool is often used for taxpayers who are currently in a lower tax bracket, who then convert just enough to remain in that lower bracket.

Maximum in 2025-no limit. 

B. Contribute to a non-deductible IRA and then do a back-door Roth conversion

This tool is most valuable when the taxpayer has no other conventional IA, Simple-IRA or SEP-IRA because the conversion process is tax and penalty-free. If the taxpayer has a conventional account the pro-rata rule discussed in another area will make part of the conversion taxable.

Maximum in 2025 $7,000 or $8,000 if over 49 at 12/31/2025.

C. Convert a 529 account to a Roth IRA

This tool allows an individual who has a 529 account that has been in existence for at least 15 years to convert an amount in the 529 to a Roth. The taxpayer needs earned income at least as much as the amount they wish to convert and there are two limits on conversion: there is a $35,000 lifetime maximum conversion amount, and the annual amount is limited to the allowable Roth contribution limit for the year (without reduction for the high-income limit).

Maximum in 2025 $7,000 or $8,000 if over 49 at 12/31/2025.

D. Make a Mega Roth contribution

Most employers that offer a 401-k allow the employee contribution to go to a Roth 401-k rather than to a conventional pre-tax 401-k. This allows the employee to deposit all or part of their current year 401-k to a Roth 401-k. In 2025 that limit is the lesser of earned income or $23,500 plus an over age 49 catch-up of $7,500. If the individual is age 60, 61, 62 or 63 at December 31, 2025 their catch-up is up to $11,250 for 2025. Plus the employer’s matching share will go to the Roth 401-k account!

Maximum in 2025 $23,500 or $31,000 if over 49 at 12/31/2025 or $34,750 if age 60, 61, 62 or 63 at 12/31/2025.

E. Make a Mega Back Door Roth conversion

What is a mega back-door Roth conversion? When employees work for an employer with a 401-k plan without a Roth 401-k option, the plan often allows the employee to convert conventional 401-k deposits to a Roth 401-k within the plan. (Called an in-plan conversion). This tool allows conventional 401-k employee deferrals, as well as employer matching amounts to be converted to a Roth 401-k or even rolled out of the 401-k to a Roth IRA. Any earnings in the account, as well as pre-tax deferrals are taxable (but not penalized) upon conversion. Because the employer match is limited to the lesser of 25% of compensation or $70,000 in 2025 (more if taxpayer is over age 49), it would be possible for the conversion amount for higher income taxpayers to be as much as the maximum 2025 401-k employer + employee contribution limit of $70,000, or $77,500 if over 49, or $81,250 if 60,61, 62 or 63 at year end.

As an example, let’s say Jean owns her own business and takes a salary of $200,000. 25% of that is $50,000. Jean is under age 50 at year end. Jean could put $20,000 in her pre-tax 401-k and her company could put in up to $50,000, for a total 2025 deposit of $70,000. If the entire amount went into a conventional 401-k and Jean’s plan allows it, she could convert the entire amount ($70,000) this year to a Roth IRA. The conversion would be taxable, but not penalized.

Maximum in 2025 $70,000 or $77,500 if over 49 at 12/31/2025 or $81,250 if 60, 61, 62 or 63 at year end.