Do the wealthy use IRAs?
But the tax incentives that the new accounts provided weren't lost on the rich or their accountants. In recent decades, with the advent of the Roth IRA and relaxed restrictions on IRA rollovers, ultrawealthy Americans have reportedly built tax-sheltered accounts worth many millions—or even billions—of dollars.
“People have gotten wealthy selling 401(k) plans and IRAs — Vanguard and Fidelity have made a lot of money managing people's retirement [savings].” If you want to invest for retirement like the wealthy, here's how Cardone says to do it.
A backdoor Roth IRA is a convenient loophole that allows you to enjoy the tax advantages of a Roth IRA. Typically, high-income earners cannot open or contribute to a Roth IRA because there's an income restriction.
If you start early enough, you may be able to get $1 million in your Roth IRA from your contributions alone. A backdoor approach can help you get money into your Roth IRA if your income is otherwise too high. Roth IRA conversions can help you keep your post-retirement income in check.
Despite the nickname, the “Rich Person's Roth” isn't a retirement account at all. Instead, it's a cash value life insurance policy that offers tax-free earnings on investments as well as tax-free withdrawals.
While the contribution limits for IRAs are relatively low compared to other accounts, you can still have a shot at building a million-dollar IRA if you invest wisely. Unlike a 401(k), a Roth IRA gives you the flexibility to invest in all types of assets, including exchange-traded funds and individual stocks.
"Unfortunately, the income limits on Roth IRAs make it difficult for many higher-income individuals to contribute directly to these accounts," said Hayden Adams, CPA, CFP®, director of tax and wealth management at the Schwab Center for Financial Research.
No, there is no maximum traditional IRA income limit. Anyone can contribute to a traditional IRA. While a Roth IRA has a strict income limit and those with earnings above it cannot contribute at all, no such rule applies to a traditional IRA.
If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $153,000 for tax year 2023 and $161,000 for tax year 2024 to contribute to a Roth IRA, and if you're married and filing jointly, your MAGI must be under $228,000 for tax year 2023 and $240,000 for tax year 2024.
More specifically, you cannot contribute to a Roth IRA if your income exceeds $161,000 for single filers or $240,000 for joint filers. The IRS also steadily reduces your Roth IRA contribution limits at incomes between $146,000 and $161,000 for single taxpayers and $230,000 and $240,000 for joint filers.
How much is the average IRA?
Americans have, on average, six-figure balances in their retirement accounts. Fidelity Investments' Q2 2023 retirement analysis reveals that the average balances in Americans' IRAs, 401(k)s and 403(b)s have hit $113,800, $112,400 and $102,400, respectively, — each one marking an increase for the third quarter in a row.
Recent data from Fidelity shows that as of Q4 2023, the average IRA balance was $116,600. If your balance is higher than that, you may be feeling pretty darn good right about now. But don't worry if your balance is lower. If that's the case and you're not on the cusp of retirement, you're definitely not doomed.
Long-time personal finance columnist Scott Burns writes that by working for four summers starting at age 16, putting the money in a Roth IRA, investing it wisely, and waiting until age 67, it's simple to become a millionaire. 1 That's the 51-year plan.
| Financial Institution | APY* | Term |
|---|---|---|
| Alliant Credit Union | 5.05% | 1 year |
| Consumers Credit Union | 5.00% | 13 months |
| Ally Bank | 4.50% | 1 year |
| Synchrony Bank | 4.80% | 1 year |
The IRA contribution limit is $7,000, or $8,000 for individuals 50 or older in 2024. Anyone with earned income can contribute to a traditional IRA, but your income may limit your ability to deduct those contributions.
A Roth IRA is an Individual Retirement Account to which you contribute after-tax dollars. While there are no current-year tax benefits, your contributions and earnings can grow tax-free, and you can withdraw them tax-free and penalty free after age 59½ and once the account has been open for five years.
Key Takeaways. However, you can contribute to a traditional IRA regardless of your income and convert those assets into a Roth IRA—a strategy known as a backdoor Roth IRA.
Bottom Line. With prudent management, a $1-million IRA at age 70 can readily fund two decades or more of retirement.
In your case, using it with a $2 million IRA would allow for $80,000 in withdrawals in the first year of retirement, with adjustments for inflation in the following years. An annual income of $80,000 is likely enough to fund a comfortable, if not luxurious lifestyle, for most retirees.
A “backdoor” Roth IRA allows high earners to sidestep the Roth IRA's income limits by converting nondeductible traditional IRA contributions to a Roth IRA. That typically requires you to pay income taxes on funds being rolled into the Roth account that have not previously been taxed.
Which IRA is better for high income earners?
Backdoor Roth IRA
How it works: Because traditional IRAs do not have any income restrictions on after-tax contributions, a backdoor Roth IRA allows high earners to access Roth IRAs through a conversion strategy.
The Rich Person's Roth concept is a life insurance productthat utilizes Internal Revenue Code 72E, 7702, and 101A for contributions into an asset class, with Market Downside Protection and allowing for Tax-Free distributions. A Participant funds the program using Post Tax Dollars.
In 2024, the Roth IRA contribution limit is $7,000, or $8,000 if you're 50-plus. The Roth IRA income limits are less than $161,000 for single tax filers and less than $240,000 for those married filing jointly.
The money remains invested and is yours to keep. Is there a penalty for contributing to a Roth IRA above the income limits? Excess contributions are subject to a 6% excise tax for each year they remain in your Roth IRA. To avoid this penalty, withdraw the excess funds before your tax deadline.
The total contribution to all of your Traditional and Roth IRAs cannot be more than the annual maximum for your age or 100% of earned income, whichever is less.
