Alternative Retirement Investment Options When Your Income Doesn't Qualify for a Roth IRA

Alternative Retirement Investment Options When Your Income Doesn’t Qualify for a ROTH IRA

The ROTH IRA is a popular way to save money for retirement because it’s one of the only ways that you can invest money today, allow it to grow with interest and the market for an indefinite amount of time, and avoid paying taxes on what you’ve gained.

For example, let’s say you invest the maximum $6,000 in a ROTH today. Over the next 20 years, it grows to $20,000. As long as the funds have been in the ROTH for five years and you are over 59.5 years old, you get to take out that $20,000 100% tax free. Even better? There is not a Required Minimum Distribution from a ROTH IRA at any future time. Plus, a ROTH IRA is a great asset to pass on to future generations because you can avoid taxation on the transfer upon your death. For all these reasons and more, ROTH IRAs offer retirement investors several advantages… That is if you qualify for a ROTH IRA.

Generally speaking, there are three reasons that people don’t take advantage of a ROTH.

  1. They are simply unaware of a ROTH IRA’s advantages.
  2. They do not have discretionary income to invest in a retirement fund of any kind.
  3. Their income is too high to be eligible to invest in a ROTH IRA.

In 2019, if you are a single taxpayer with modified adjusted gross income (MAGI) of more than $137,000, you are not able to participate. Same goes if you are married, filing jointly with a MAGI of over $203,000.

These limits force high income earners to seek other tax efficient ways to plan for retirement. A few of their options follow.

ROTH 401(k)

The ROTH 401(k) entered the retirement investment community in 2006, and it could be considered one of the better advantages that has ever happened to high income earners who want to participate in a ROTH. How so? There are no income limitations for participating in a ROTH 401(k). And, the contribution limits are much higher.

A ROTH 401(k) falls under the same elective deferral limits as a traditional 401(k), so the base elective deferral maximum is $19,000. For those 50 years old and older, a catch-up contribution of $6,000 is allowed. Ask your HR department if your employer offers the ROTH 401(k).

Traditional 401(k), SEP, SIMPLE IRA, or Solo 401(k)

All of these methods are typically tax deductible and tax deferred, but you have to pay taxes on the withdrawals later in life. Although they don’t grow tax free like the ROTH IRA, they do provide current tax advantages, and they are a great way to build up a nest egg. The amount that you can contribute to each of these plans varies based upon the plan type, so it is important to check with your financial advisor to investigate which plan is available to you and how much you can contribute.

Overfunding a Life Insurance Policy

This option can be considered a little bit outside of the box, but for some high-income earners, it can be a very powerful savings tool. Conceptually, it works like this:

  • You purchase a permanent life insurance policy and invest more into the policy each year than required.
  • The policy will build a cash value that will either earn an interest rate or be invested in funds or an index.
  • Over the years, the cash value should grow significantly.
  • At a later date or upon retirement, you can take distributions from the cash value of the policy.
  • The growth of the cash value, the distributions, and the death benefit are all tax free as long as the policy is still in force upon your death.
  • Because this is tax advantaged, you are limited to the amount that you can invest in the policy each year and that limit is called a 7-pay premium, which is determined by the size of the policy.

These are three of the more popular options for high income earners to save money and receive current or future tax benefits to do so. They, however, are not the only alternatives to ROTH IRAs that are available.

READ: How Can a Financial Advisor Help Me if I’m 5 to 10 Years Away from Retiring?

If you are a high-income earner, I would highly suggest consulting a CERTIFIED FINANCIAL PLANNER™ professional or retirement planner, such as our team at Metcalf Partners Wealth Management to further explore your options to make sure that you are taking full advantage of any tax benefits that might be available to you.


The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. We suggest that you speak with a tax professional about your individual situation before taking any actions. 

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. The hypothetical example provided is not representative of any specific situation. Your results will vary.