They Lied About Your ROTH Strategy (Is Your Income REALLY Too High?)

You've probably been told you make too much money to use a Roth IRA. That is a lie. What most people don't realize is how powerful the Roth actually is. And believing you're disqualified can cost you tens or even hundreds of thousands in taxes.

After more than 30 years working with high earners, we see this mistake all the time. The truth is, even if you make too much for a Roth IRA, you still have options. Here's what you're not being told. There are ways to use Roth even if you're at those higher income levels. The problem is, using it the wrong way, that can cost you more than the taxes you were trying to avoid.

There is a widely believed rule that says, if your income is too high, you cannot contribute to a Roth IRA. And that rule does exist, but here's where this starts to break down. Roth IRA contributions are limited based on income. So, it's natural for people to assume they're disqualified, and then they just move on, which is where people get into trouble.

Because most people don't question it. They just stop there, and they follow the crowd. Believe me, doing what the crowd does can cost you big time. Just hear me on this. Assuming you can't benefit from a Roth is where most people miss a huge opportunity. And that's because what I'm about to tell you is the part that most people have never even heard of.

Even if your income is above the Roth IRA limits, you can still fund a Roth account. There's a strategy called the backdoor Roth IRA. Let's look at how it works in simple terms. You make an after-tax contribution to a traditional IRA. Then, immediately, you convert that contribution to a Roth IRA, hence the backdoor. Regardless of income, you can get $7,500 into a Roth or $8,600 if you're over age 50.

Most people believe they cannot contribute to a traditional IRA if they exceed income limits. We see this all the time where clients believe that they are limited and that they cannot do an IRA if it's not deductible. After all, that's what the crowd tells them. Well, that's just not true. We help people make after-tax IRA contributions every year.

Now, when done correctly, this strategy allows high-income earners to benefit from a Roth IRA regardless of those income limits. The limits only apply to deductibility, not the contribution. And you can do this every year. Best of all, your Roth assets will never be taxed, even when you leave these assets to your beneficiaries. That's a huge benefit.

This is where it gets even more interesting because most people think the backdoor Roth is their only option. Or this is where people mess it up because there are rules and it needs to be done correctly.

Let's break this down with a story from one of our clients. This is a doctor, and he came to me recently and said, "I read that in the year 2026, my 401k catch-up contribution of $8,000 has to go into Roth. My employer told me that they allow for the catch-up contributions." He then went on to ask, "Am I in fact eligible to do that given my income level?" "In general, I always thought my Roth option only could be done with a backdoor conversion."

This is a perfect example of someone who understood the backdoor conversion that we talked about a few minutes ago, but they weren't sure how things work inside of the 401k. And this is the part most people completely miss. The fact is backdoor conversions are not needed in the 401k environment.

Plus, his employer was right. According to Secure Act 2.0, anyone over 50 years old and making more than $150,000 per year is required to direct all catch-up contributions to Roth. The exception is when the employer doesn't offer this option. In that case, the over 50-year-old would not be able to make a catch-up contribution in the traditional or Roth side of the plan.

Now, stay with me here. This part matters. He goes on to say, "Assuming I am eligible to make the catch-up contribution to Roth, am I allowed to divert more than just my catch-up to the Roth? Is that something I would even want to do if I were allowed?"

Now, just to be clear, if your employer provides a 401k, you can defer up to 100% of your income, not to exceed $24,500 in 2026. This amount does not include the catch-up contribution. To answer the doctor's question, yes, you could defer the entire $24,500 to Roth.

Now, here's where this gets really important because the second part of his question is the one that more people should be asking. "If I can divert more of my income to Roth, is that something I would want to or should do?" Unfortunately, the answer is not black and white. It depends, and I hate to say that. This is where tax planning can be worth its weight in gold. And this is where most people get surprised.

The simple answer is, if your forecasted tax rate during retirement is lower than your current tax rate, Roth contributions might not make sense. That's right, they might not make sense. On the other hand, if your forecasted rate is greater than your current rate, then Roth is probably a solid play.

In our doctor's case, his forecasted tax rate is no greater than his current rate. So, Roth may not be an obvious choice. On the other hand, let's consider two more points. If he or his spouse predeceases the other, income tax rates change. That's because brackets fill more quickly for single filers. He has two children and he prefers they not be left with a huge tax bill that comes from his retirement accounts being inherited by those children. Remember, retirement accounts are income taxable to the beneficiary.

Now, based on this information, it's entirely possible that some Roth contributions will benefit the doctor and his family. This is where good planning can help. And by the way, the doctor plans to retire early. He and his wife will need income. So, building a nest egg in Roth, that can provide some additional and greater flexibility and tax control when it comes to funding that early retirement.

So, you can see so far, there's really two issues here. Not being sure of the rules inside of the 401k environment and I think there's a lack of planning in many cases for people just like this doctor.

Here's the good news. If you have access to a 401k, there is no income limit for Roth contributions inside that plan. Now, that assumes that your plan offers the Roth option. That means regardless of how much you make, you can contribute to a Roth 401k as long as your employer provides that option.

So, after all that, here's what actually matters. The real question is not can I use Roth? The real question is, should I use Roth? Most people assume that because Roth contributions are after-tax, they're automatically worse. But, that is not how this works. The decision between Roth and pre-tax is not about paying tax or avoiding tax. It is about when you pay the tax. And getting that wrong is where this can get really expensive.

If your future tax rate is forecasted to be higher than it is today, Roth could be extremely powerful. Or, you might believe that tax rates are going up because our country has a debt problem. Now, that's for another show, but our debt crisis is a legitimate concern when it comes to how politicians might change the tax code. If your future tax rate is lower, pre-tax just might make more sense. This requires actual tax planning, not guesswork. And this is exactly where most people make a costly mistake.

The biggest mistake we see is people defaulting to pre-tax contributions without ever analyzing their future tax exposure. They are deferring taxes today, but potentially setting themselves up for higher taxes later. And most people just don't realize this until retirement. At that point, it's much harder to fix. Over time, that decision can compound into a significant tax cost. And that means loss of net worth. And by then, the cost of that decision has already compounded.

The biggest mistake that we see is people defaulting to this pre-tax contribution without ever analyzing their future tax exposure. They're deferring taxes today, but potentially setting themselves up for higher taxes later. Over time, that decision can compound and it can turn into a significant tax cost.

If you're not sure whether Roth or pre-tax makes sense in your situation, this is exactly the kind of decision that should be reviewed. Keep in mind, our firm offers a free second opinion where we analyze your current strategy, your tax exposure, and with that, we can help you determine whether you're positioned efficiently and if Roth makes sense. You can access that using the link below, or you can visit us at omnistarfinancial.com.

And if you want to understand how to intentionally move money from pre-tax accounts into Roth accounts over time, there is a strategy called Roth repositioning and that can dramatically change how your retirement income is going to be taxed. Click or tap the screen now to watch that video.