IRA Options for High-Income Earners

An Individual Retirement Arrangement, or IRA, is a savings plan with tax advantages for retirement. While many people can contribute to an IRA, an individual’s income level plays a significant part in determining their eligibility for certain benefits.

High-income earners often face restrictions established by the Internal Revenue Service (IRS). These rules can prevent direct contributions to certain types of IRAs or affect whether contributions made to other types of IRAs can be deducted from taxable income. This creates a challenge for those with substantial earnings who wish to utilize these popular retirement savings vehicles.

Understanding IRA Contribution Limits for High Earners

The Internal Revenue Service (IRS) uses a specific income calculation, Modified Adjusted Gross Income (MAGI), to determine eligibility for certain IRA benefits. MAGI is your Adjusted Gross Income (AGI) with certain deductions, such as student loan interest, added back. This figure is the benchmark for whether you can contribute to a Roth IRA or deduct contributions to a Traditional IRA.

Direct contributions to a Roth IRA are subject to strict income limitations. For the 2025 tax year, a single filer’s ability to contribute begins to phase out with a MAGI between $150,000 and $165,000. For those who are married and filing jointly, the phase-out range is between $236,000 and $246,000. If your MAGI exceeds the upper threshold, you cannot contribute to a Roth IRA for that year.

A similar income test applies to the deductibility of Traditional IRA contributions, but only for individuals who are also covered by a retirement plan at work. For 2025, if you are a single filer covered by a workplace plan, the deduction is phased out for MAGI between $79,000 and $89,000. For those married filing jointly where the contributing spouse is covered by a workplace plan, the phase-out range is $126,000 to $146,000. Exceeding these limits means your contribution is considered nondeductible.

Being unable to contribute to a Roth IRA means losing the opportunity for tax-free growth and withdrawals in retirement. When a Traditional IRA contribution becomes nondeductible, it loses its primary upfront advantage of reducing your current taxable income.

The Backdoor Roth IRA Strategy

For high-income earners phased out of making direct Roth IRA contributions, the “backdoor” Roth IRA provides an alternative path. This method involves a two-step process, the first being to make a nondeductible contribution to a Traditional IRA. Since there are no income limits on contributing to a Traditional IRA, this step is available to anyone with earned income. The annual contribution limit for 2025 is $7,000, or $8,000 for those age 50 and over.

Shortly after making the nondeductible contribution, the second step is to convert the Traditional IRA to a Roth IRA. This conversion moves the after-tax funds from the Traditional IRA into the Roth account, where they can then grow and be withdrawn tax-free in retirement. Because the initial contribution was made with after-tax money, the conversion itself is not a taxable event, assuming there are no earnings in the account between the contribution and the conversion.

The primary detail to understand when executing this strategy is the pro-rata rule. The IRS requires that when you convert funds from a Traditional IRA to a Roth IRA, you must consider all of your Traditional, SEP, and SIMPLE IRA accounts as one single entity. You cannot simply convert only the new, nondeductible contribution if you have other existing IRA funds that were built with pre-tax contributions. The conversion is treated as a proportional distribution of your after-tax and pre-tax IRA assets.

To illustrate the pro-rata rule, consider an individual with an existing Traditional IRA holding $93,000 in pre-tax funds. They make a new $7,000 nondeductible contribution, bringing their total IRA assets to $100,000. Of this total, 93% is pre-tax money and 7% is after-tax money. If they then convert $7,000 to a Roth IRA, the IRS considers 93% of that conversion, or $6,510, to be from the pre-tax portion, which becomes taxable income in the year of the conversion.

Required Information and Tax Reporting

Executing a backdoor Roth IRA strategy requires documentation through IRS Form 8606, Nondeductible IRAs. This form is the mechanism for reporting nondeductible contributions to a Traditional IRA and for calculating the taxable portion of a Roth conversion. Failing to file this form can result in penalties and may lead to the entire conversion amount being taxed.

Part I of Form 8606 is where you report your nondeductible contributions for the tax year. You enter the nondeductible contributions you made for the year and your total basis in Traditional IRAs from prior years. This tracking of basis, which is the cumulative amount of all previous nondeductible contributions, is what prevents your after-tax money from being taxed a second time.

Part II of Form 8606 addresses the Roth conversion itself and guides you through the pro-rata calculation. You will need to report the net amount converted to a Roth IRA and the total value of all your Traditional, SEP, and SIMPLE IRAs as of December 31 of the conversion year. The form uses these values to calculate the ratio of pre-tax to after-tax money, determining the figure that must be included in your taxable income.

Alternative Retirement Plans for High Earners with Self-Employment Income

High-income individuals who earn money outside of traditional employment have access to other retirement savings plans. For sole proprietors, freelancers, and small business owners, a Simplified Employee Pension, or SEP IRA, is a common option. This plan allows for contributions to be made by the employer—in this case, the self-employed individual. Contributions are flexible and not required every year.

The contribution limits for a SEP IRA are substantial. For 2025, a business owner can contribute up to 25% of their compensation, with a maximum contribution of $70,000. For a self-employed individual, “compensation” is defined as net adjusted self-employment income. Only employer contributions are permitted in a SEP IRA; employees cannot make salary deferral contributions.

Another option for the self-employed is the Solo 401(k), also known as an individual 401(k). This plan is available to self-employed individuals or business owners with no employees, other than a spouse. The dual contribution structure allows the individual to contribute as both the “employee” and the “employer,” which often permits a higher total contribution than a SEP IRA at the same income level.

The dual contribution structure for 2025 allows for the following:

• An “employee” contribution of up to 100% of compensation, not to exceed $23,500.
• An “employer” contribution of up to 25% of compensation.
• An additional catch-up contribution of $7,500 for individuals aged 50 and over.
• A larger catch-up contribution of $11,250 for those aged 60 to 63.

The total combined contributions cannot exceed $70,000 for 2025. The Solo 401(k) can also be established with a Roth component, allowing for after-tax employee contributions.