Navigating IRAs Over Income Limits

Roth vs. Traditional IRA at High Income Levels: What You Can Do, and Why It Matters

Let’s kick off with listener Bart’s excellent question—one that touches on a topic many in the FI community eventually run into as their income grows:

Many Americans Can Contribute to a Traditional IRA But Cannot Deduct the Contribution

Bart, thanks so much for the question—it’s a classic case complexity in the tax code for retirement savings. The important distinction here is between two things:

❓ Can workers contribute to a traditional IRA?

✅ Yes, absolutely.

❓ Can workers deduct that traditional IRA contribution?

🚫 Not if they and/or their spouse is covered by a workplace retirement plan and their income is above certain limits.

That’s the key: The deduction is income-limited—not the contribution itself.

2025 Income Limits for IRA Deductibility (Married Filing Jointly)

Let's look at the numbers for tax year 2025:

📌 Traditional IRA Deductibility:

If either spouse is covered by a workplace retirement plan (like a 401(k), 403(b), or TSP), then:

• Full deduction: AGI ≤ $126,000
• Partial deduction: AGI between $126,000–$146,000
• No deduction: AGI ≥ $146,000

Those filing jointly with an AGI above $146,000 can still contribute to a traditional IRA, but it won’t be deductible.

📌 Roth IRA Contribution Income Limits (2025):

• Full contribution allowed: AGI ≤ $236,000
• Phase-out range: AGI $236,000–$246,000
• No contribution allowed: AGI ≥ $246,000

Non-Deductible Traditional IRA versus Roth IRA?

There's no particular advantage to a non-deductible traditional IRA contribution when compared to a Roth IRA contribution. Neither has a tax deduction, but the Roth IRA contribution enjoys tax free growth. The non-deductible traditional IRA contribution does not.

🔗 Related: 2025 IRA Contributions for Beginners

The Backdoor Roth IRA: The Power Move for High Earners

Those over both the traditional IRA deduction income threshold and the Roth contribution income threshold should consider The Backdoor Roth IRA.

Here’s how it works:

1. Make a Non-Deductible Contribution to a Traditional IRAAnyone with earned income (or a spouse with earned income) can do this—income doesn’t disallow this contribution. 2. Convert to a Roth IRAI wrote a blog post detailing my thoughts on how long to take between steps 1 and 2.

This tactic allows high-income earners to access the tax-free growth of a Roth IRA even if they’re locked out of direct contributions.

Just remember: For those with other traditional IRA balances, the Pro Rata Rule applies.

🔗 Related: Backdoor Roth IRAs for Beginners

Beware the Pro Rata Rule!

For those with existing pre-tax money in traditional IRAs (from rollovers or old accounts), the Backdoor Roth gets complicated.

The IRS uses a formula called the Pro Rata Rule:

• It treats all traditional IRA money as one big pot.
• So if 80% of an IRA is pre-tax, and 20% is after-tax, any conversion is 80% taxable.
• That can lead to surprise tax bills.

How to Navigate the Pro-Rata Rule:

I did a blog post on the Pro-Rata Rule.The Backdoor Roth IRA is not for everyone. For those who cannot use the tactic efficiently, there are other good options, including investing for retirement through taxable brokerage accounts.

Final Thoughts: IRA Strategy in the FI Journey

Deductible IRA contributions are very limited for many workers.

But that doesn’t mean high earners are out of options.

• Those under the Roth income cap can contribute directly to a Roth IRA.
• Those over can consider the Backdoor Roth tactic.
• Usually non-deductible traditional IRA contributions make little sense for most accumulators unless the non-deductible traditional IRA contribution is part of a Backdoor Roth IRA.

And as your tax picture evolves, keep your eye on the goal: lifetime tax optimization. Not just what saves money this year, but what helps build a flexible, tax-efficient financial future.

Related Resources:

• 🔗 2025 IRA Contributions for Beginners – The FI Tax Guy
• 🔗 IRS: IRA Deduction Limits for 2025
• 🎙️ ChooseFI Tax Strategies