For federal employees, a Roth IRA is one of the most powerful retirement savings strategies available. Together with their Roth TSP accounts, federal employees can save for their future retirement in a tax-free way. Any Roth accounts remaining at their deaths can be passed on to family members tax-free.
However, those federal employees who are high earners may be limited or even barred from contributing to a Roth IRA. Fortunately for high earning federal employees, there are opportunities beside direct Roth IRA contributions that will allow them to fund their Roth IRAs. This column is the first of two columns discussing these opportunities.
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Income Limits on Roth IRA Contributions
Roth IRAs became available in 1998. The idea behind the Roth IRA is easy to understand. Contributions to Roth IRAs are never tax deductible. Accrued earnings in the Roth IRA grow tax-free and qualified Roth IRA distributions are income-tax free. However, when Congress established Roth IRAs, they imposed income limits on individuals making Roth IRA contributions. The following table shows the modified adjusted gross income (MAGI) limits for individuals making 2024 Roth IRA contributions:
Roth IRA Contribution Phase-Out (2024)
*An individual filing married filing separate who did not live with their spouse at any time during the year is treated as a single tax filer.
** Modified AGI is equal to:
Adjusted gross income (AGI) –
Income from Roth IRA conversions –
Income from Roth IRA rollovers from employer retirement plans +
Deductions for traditional IRA contributions +
Student loan interest deductions +
Foreign earned income exclusion +
Exclusion of qualified bond interest for education +
Exclusion of employer-provided adoption benefits.
Note the following:
1. The maximum 2024 Roth IRA contribution is $7,000 for individuals younger than age 50 as of 12/31/2025, and $8,000 for individuals older than age 49 as of 12/31/2025. Contribution deadline is April 15, 2025.
2. IRS has a “reduced Roth IRA contribution worksheet” for individuals who are between the MAGI limits in the table above.
3. If an individual with a MAGI that exceeds these limits contributed to a Roth IRA for 2024, then the individual will have an excess Roth IRA contribution. If the excess contribution is not corrected in a timely manner, a 6 percent IRA “excess contribution” penalty will apply.
The following example illustrates ineligibility to make a Roth IRA contribution due to high MAGI.
Example 1. Stephanie, aged 34, is a federal employee. During 2023, Stephanie’s MAGI was $130,000 which allowed her to make a full Roth IRA contribution for the year 2023. During 2024, Stephanie got married to Jason, also a federal employee. During 2024, Stephanie’s and Jason’s combined MAGI was $256,000. This makes both Stephanie and Jason ineligible to make a 2024 Roth IRA contribution.
The MAGI limits can be a source of frustration for those individuals who want to contribute to their Roth IRAs. However, the Roth IRA contribution restrictions can be circumvented by other methods to fund Roth IRA accounts. Two of these ways are presented below.
Roth IRA Conversion
A Roth IRA conversion can be an attractive option for those federal employees or retirees who have excess MAGI and are looking to fund a Roth IRA. Any individual who owns a contributory or rollover traditional IRA, a traditional SEP IRA, or a traditional SIMPLE IRA can convert their traditional IRA to a Roth IRA. Note that there are no income limitations for converting. There is also no requirement of earned income, unlike contributing to a Roth IRA. There is also no age restriction. Finally, there are no restrictions on the amount that can be converted.
But those individuals looking to convert their traditional IRAs to Roth IRAs need to be aware that any before-taxed dollars in the traditional IRA will be included in income in the year the IRA is converted. Once a traditional IRA is converted the conversion cannot be undone (“recharacterized”).
The following example illustrates:
Example 2. Jason, age 37, has always made deductible traditional IRAs. But in 2024 he married Stephanie (Example 1) who explained the benefits of the Roth IRA to him. He currently has $300,000 in his traditional IRA which is funded entirely with before-taxed dollars. Since Jason cannot contribute to a Roth IRA due to Stephanie’s and Jason’s large 2024 MAGI, Jason decides to convert $75,000 from his traditional IRA to a Roth IRA. This is permitted because there are no income limits on converting a traditional IRA to a Roth IRA.
“Backdoor” Roth IRA
Another option for federal employees who are looking to fund a Roth IRA is to perform a ‘backdoor” Roth IRA conversion. This option which gets around the MAGI limits for contributing to a Roth IRA has been in use for several years.
To perform a backdoor Roth IRA conversion, an individual makes a nondeductible traditional IRA contribution. Note that there is no age or MAGI limits when it comes to making a nondeductible traditional IRA contribution. The individual has to have earned income to make the contribution. Shortly after making the nondeductible traditional IRA contribution, the individual converts the IRA to a Roth IRA. Once again, with no MAGI limitations.
An important restriction to keep in mind with the backdoor Roth IRA conversion, the normal traditional IRA distribution rules apply. This includes the “pro-rata” rule. The pro-rata rule affects traditional IRA owners (including traditional SEP IRA and traditional SIMPLE IRA owners) in which contributions were deductible. As of December 31 of the year of the backdoor Roth conversion, all IRA funds are considered when determining the portion of the conversion that is taxable. It is important to understand that there will be a tax liability on a portion of the backdoor conversion if there exist deductible (before-taxed) traditional IRA contributions. The taxation of the conversion is determined using IRS Form 8606 (Nondeductible IRAs), as shown here:
The following example illustrates:
Example 3. Stephanie and Jason in Examples I and 2 are both ineligible to contribute directly to a Roth IRA for 2024. But they can each make a $7,000 backdoor Roth IRA conversion. Since Stephanie has no other traditional IRA funds, her conversion will be tax-free. On the other hand, Jason has funds in a deductible traditional IRA, made up entirely of before-taxed dollars. This means a portion of Jason’s backdoor Roth IRA conversion will be taxable.