What Are My Savings Options If I Don’t Qualify for a Roth IRA?

What Are My Savings Options If I Don’t Qualify for a Roth IRA?

February 08, 2017

Saving for retirement is an important step in securing your future, and there are many different savings vehicles to choose from, including a Roth Individual Retirement Account (IRA). But, in order to contribute to a Roth IRA, you have to meet some qualifications. If your adjusted gross income (AGI) exceeds the income limits and you can’t contribute to a Roth IRA, what are your options for saving for retirement?

Roth IRA Qualifications

Before you dismiss the option of a Roth IRA, let’s establish what the income limits are. If you are single and your AGI is more than $133,000, you are out of luck and not eligible to contribute to this type of retirement account. If you are married and filing jointly, an AGI of $196,000 is the limit. If your AGI is under $118,000 as a single person or $186,000 as a married couple, you can contribute a maximum amount of $5,500 a year, or $6,500 if you are over 50, thanks to the catch-up provision.

The 401(k) Option

If you can’t save using a Roth IRA, what are your other options? While a 401(k) may seem like an obvious choice to some, others tend to forget about this option because they aren’t sure it is worth the effort to contribute if their employer doesn’t match their contributions. Don’t believe this for a second! It is worth the effort to contribute to your retirement account because you are investing in yourself and your future. Every little bit helps, and those small contributions will earn interest and compound over time.

The other common misconception is that setting up a 401(k) may not be worth the time it takes, especially if you aren’t sure you will stay at your job for a long time. Regardless of your length of employment, 100% of the money you contribute to your 401(k) is yours, and you can take it with you when you leave your job. The one catch is if your employer matches your contribution, make sure you are fully vested before you give notice, or some of the match amount may stay with your company.

Also, it is important to note that 401(k) contributions lower your taxable income. In some cases, contributing more to your 401(k) will enable you to lower your AGI enough to qualify for the Roth IRA.  And remember, it’s not all about you. If you are married and your spouse has a 401(k), their contribution to the 401(k) may lower your joint AGI enough to be able to contribute to your Roth IRA. Multiple retirement savings accounts means you can maximize your annual contributions, allowing you to save even faster for your future.

The Roth 401k Option

Many people may not realize that their employer added a Roth 401(k) as an option to the employer-sponsored retirement plan. A Roth 401(k) is different from a 401(k) because it is funded with after-tax dollars, instead of pre-tax dollars. Unlike the Roth IRA, contributions to a Roth 401(k) are not subject to income limitations, so if you are a high income earner, you can still contribute after tax money into your account.

One of the biggest benefits of a Roth 401(k) is your money grows tax free. Depending on your unique situation and desire for a tax deduction, you may choose to split your contributions between a Roth 401(k) and a traditional 401(k). This allows you to have some money growing tax free, but at the same time taking care of today by paying a bit less in taxes.

Other Options

If you’ve exhausted your 401(k) or Roth 401(k) options, you are still in luck. You can look into a variable annuity (VA) for tax deferral. While this is a valid option, you may want to consider using this only after utilizing your or your spouse's 401(k) to their full extent. The 401(k) option gives you a tax deferral plus a deduction, whereas the VA only grants you tax deferral.  It is important to note that variable annuities are investments and are subject to market risk, investment risk, and possible loss of principal1.

Another option to weigh is your life insurance policy. Some life insurance vehicles offer loan provisions which can provide lifetime income after reaching a certain age. When properly utilized, a life insurance policy can provide tax-favored withdrawals. Before you purchase a life insurance policy, be sure you are familiar with all its potential benefits and risks.  Policy loans and withdrawals will reduce the policy's cash value.  Loans are subject to interest charges. Guarantees are based on the claims-paying ability of the issuer and do not protect against market fluctuation. 

How I Can Help

As you now know, there are many other savings options to consider if you don’t qualify for a Roth IRA. I’d appreciate an opportunity to help you evaluate your current situation and find an appropriate option, or combination of options, for you. Helping clients make educated decisions about their money is why I love to come to work everyday. To set up a meeting, call my office at (949) 221-8105 x 2128, or email me at michael.loo@lpl.com.

About Mike Loo

Mike Loo is an independent financial advisor with more than 20 years of experience in the financial services industry. His mission is to provide a meaningful impact on the lives of clients and the people they care most about, help them make educated decisions with their money, and build a strong financial foundation for both themselves and their next generation. Mike is committed to meeting a high standard of excellence, taking the time to listen to clients’ needs, and designing strategies that aim to help clients save money and reduce debt. He seeks to fit a client’s investments into their life and educate them so they’ll understand their investments. To learn more about how Mike may be able to help, connect with him on LinkedIn, call his office at (949) 221-8105 x 2128, or email him at michael.loo@lpl.com.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Trilogy Capital, a registered investment advisor. Trilogy Capital and Trilogy Financial are separate entities from LPL Financial.