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How high earners can use a backdoor Roth IRA

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IRA access, tax breaks can phase out for high earners

IRAs have a $7,000 annual contribution limit for 2024. Investors age 50 or older can save an extra $1,000, or $8,000 total this year.

Investors who save in a pretax IRA typically get a tax deduction on their contributions. However, they generally pay income tax later on earnings and withdrawals. Roth contributions don’t get the same upfront tax break: Investors fund Roth IRAs with after-tax money, but generally don’t pay income taxes on earnings or withdrawals in retirement.

Maximizing your Social Security benefits

Many high earners can’t make the most of these tax-advantaged accounts, though.  

For example, married couples who file a joint tax return can’t contribute to a Roth IRA in 2024 if their modified adjusted gross income is $240,000 or more. The income threshold for single filers is $161,000. (Eligibility starts to phase out even before these dollar thresholds, reducing how much investors can contribute.)

Likewise, there are income limits on deductibility for pretax (also known as “traditional”) IRAs, for those who also have access to a workplace retirement plan like a 401(k).

For example, single filers with income of $87,000 or more in 2024 don’t get a tax deduction for contributions to a traditional IRA, if they are covered by a retirement plan at work.

The same holds true for married couples filing jointly. For example, if your spouse participates in a 401(k) plan at work, you don’t get a deduction on IRA contributions if your joint income is $240,000 or more. If you are the one who participates in workplace 401(k), the limit is $143,000. (Again, you may only get a partial deduction below these dollar thresholds due to income phaseouts.)

The ‘only reason’ to save in a nondeductible IRA

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The idea that you could work longer if you didn’t save enough is just not true: Teresa Ghilarducci

“The only reason you’d do [a nondeductible IRA] is if the intention was to do a backdoor Roth,” Slott said.

After making the nondeductible contribution, Slott recommends waiting about a month before converting the funds to a Roth IRA. This ensures your IRA statement reflects the nondeductible contribution, in case the IRS should ever require proof, he said.

Some investors may also be able to take advantage of a similar strategy in their 401(k) plan, the so-called mega backdoor Roth conversion. This entails shifting after-tax 401(k) contributions to a Roth account. However, the strategy isn’t available to everyone.

“All high wage earners should consider looking at both a backdoor Roth IRA and a mega backdoor Roth IRA if they can’t set up a Roth IRA,” said Ted Jenkin, a certified financial planner and founder of oXYGen Financial, based in Atlanta. He’s also a member of the CNBC Financial Advisor Council.

When a nondeductible IRA doesn’t make sense

Why taxable brokerage accounts ‘are probably better’

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Without a backdoor Roth in play, most investors would be better suited by saving in a taxable brokerage account rather than a nondeductible IRA, advisors said. That’s because investors using the former will likely end up paying less in tax on their profits over the long term.

Taxable brokerage accounts “are probably better in most aspects,” Slott said.

Investors who hold assets like stocks in a taxable brokerage account for more than a year generally pay a favorable rate on their profits relative to other income taxes.

These “long term” capital gains tax rates — which only apply in the year investors sell their asset — are as high as 20% at the federal level. (High earners may also owe a 3.8% “Medicare surtax” on profits.)

By comparison, the top marginal income tax rate is 37%. Investors in nondeductible IRAs are subject to these generally higher rates on earnings upon withdrawal.

While taxable brokerage account investors pay taxes each year on dividend income, such taxes are generally not enough to negate the relative tax benefits of such accounts, advisors said.

“The tax deferral of non-deductible IRAs can be an advantage for some,” according to Arnold & Mote Wealth Management. “However, we find that this is quite rare.”

Additionally, investors in taxable brokerage accounts can generally access their funds anytime without penalty, whereas IRAs generally carry tax penalties when earnings are tapped before age 59½. (There are some IRA exceptions, however.)

Taxable accounts have no required minimum distributions while the account holder is alive, unlike traditional and nondeductible IRAs.

“A taxable account provides the flexibility to add money and take money out with few limits, penalties, or restrictions,” Judith Ward, a certified financial planner at T. Rowe Price, an asset manager, wrote recently.

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3 red flags to avoid

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‘People don’t know a lot about tariffs’

Tariffs are taxes on goods imported from other countries, paid by the entity importing those goods. Businesses in turn often pass the cost of tariffs along to consumers in the form of higher prices.

In April, U.S. President Donald Trump enacted sweeping tariffs of varying rates affecting more than 180 countries and territories. Last week, the U.S. and China struck a deal to temporarily suspend most tariffs on each other’s goods. The U.S. also recently unveiled a trade agreement with the United Kingdom. 

Despite the recent trade agreements and deals, consumers still face an overall average effective tariff rate of 17.8%, the highest since 1934, according to a recent report by the Yale Budget Lab. 

James Lee, president of the Identity Theft Resource Center, said it’s not unusual for scammers to take a government action — whether that’s a new program or policy — and use it for the basis of a scam.

Scammers “will use the fact that people don’t know a lot about tariffs,” Lee said.

AI generated deepfake scam is 'phishing with a twist', says Fortalice Solutions CEO Theresa Payton

The PreCrime Labs team at BforeAI, a cybersecurity company, discovered about 300 domain registrations from cybercriminals related to tariffs in the first few months of the year. Some spread misinformation while others are financial scams aimed at businesses and consumers.

One site the company found was a newly registered phishing domain positioned to lead consumers to believe they are required to make payments to a legitimate governmental entity.

“Such payment requests are likely to be spread using email or messaging campaigns with a theme of urgent, pending payments, directing victims to the fraudulent site where their actions will result in financial losses,” researchers noted.

Some package payment requests are real

There are some cases where consumers might legitimately pay for products purchased from another country, namely, customs duties. Sometimes the U.S. Customs and Border Protection will charge consumers a processing fee in order to release an imported good. 

“That’s not common, but it’s also not unusual,” said Lee. “It really does depend on what it is, where it’s coming from.”

Some consumers have also recently reported receiving legitimate payment requests from carrier companies after a purchase in order to receive their shipments, the Washington Post reports.

Some carriers are acting as the importer of record, meaning they are responsible for any duties, taxes and fees that are applied to the delivery, said Bernie Hart, vice president of customs of Flexport, a logistics firm.

If the carrier did not collect those additional fees for the product up front, the carrier will charge the end consumer those additional costs through a follow-up bill, he said.

This tactic might not last, because it creates a lot of inconvenience for both companies and shoppers, Hart said: “It’s not good for anybody in this process to give somebody a surprise bill.”

Tariff scam red flags

It’s easy for anyone to fall victim to a fraud scheme, said Ruth Susswein, director of consumer protection at Consumer Action. 

If tariff policies continue to be in flux for longer, criminals will have more time to craft sophisticated attacks on consumers, said the ITRC’s Lee. 

Your top priority is to avoid sharing personal information like Social Security numbers, bank details or account login credentials, especially under the guise of “tariff processing,” said Payton.

Here are three red flags to watch out for, according to scam experts:

1. Unsolicited and urgent messages

2. Suspicious site links, emails

Scammers will create fake websites, emails and phone numbers to mimic retailers or government agencies, Payton said. If you receive a message, check for misspellings and URLs or email addresses that don’t match that of the supposed company or entity — say, a message from a “U.S. government official” that does not come from a dot-gov email.

You can use tools like WHOIS, a database that stores information about registered domain names and IP addresses, to authenticate the website and confirm registration details, she said.

3. Lack of transparency

Reputable merchants would clearly label tariff-related fees at checkout and provide contact information for inquiries, Payton said. Otherwise, the “lack of transparency is a red flag.”

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What Moody’s downgrade of U.S. credit rating means for your money

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A woman shops at a supermarket on April 30, 2025 in Arlington, Virginia.

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Moody’s decision to downgrade the U.S. credit rating may have consequences for your money, experts say.

The debt downgrade put immediate pressure on bond prices, sending yields higher on Monday morning. The 30-year U.S. bond yield traded above 5% and the 10-year yield topped 4.5%, hitting key levels at a time when the economy is already showing signs of strain from President Donald Trump’s unfolding tariff policy.

Treasury bonds influence rates for a wide range of consumer loans like 30-year fixed mortgages, and to some extent also affect products including auto loans and credit cards.

“It’s really hard to avoid the impact on consumers,” said Brian Rehling, head of global fixed income strategy at Wells Fargo Investment Institute.

Moody’s lowers U.S. credit rating

The major credit rating agency cut the United States’ sovereign credit rating on Friday by one notch to Aa1 from Aaa, the highest possible.

In doing so, it cited the increasing burden of the federal government’s budget deficit. Republicans’ attempts to make President Donald Trump’s 2017 tax cuts permanent as part of the reconciliation package threaten to increase the federal debt by trillions of dollars.

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Here’s a look at other stories impacting the financial advisor business.

“When our credit rating goes down, the expectation is that the cost of borrowing will increase,” said Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management in Washington, D.C.

That’s because when “a country represents a bigger credit risk, the creditors will demand to be compensated with higher interest rates,” said Johnson, a member of CNBC’s Financial Advisor council.

‘Downgrades can raise borrowing costs over time’

Americans struggling to keep up with sky-high interest charges aren’t likely to get much relief any time soon amid Moody’s downgrade.

“Economic uncertainty, especially regarding tariff policy, has the Fed — and a lot of businesses — on hold,” said Ted Rossman, a senior industry analyst at Bankrate.

Atlanta Fed President Raphael Bostic said on CNBC’s “Squawk Box” Monday that he now sees only one rate cut this year as the central bank tries to balance inflationary pressures with worries of a potential recession. Federal Reserve Chair Jerome Powell also recently noted that tariffs may slow growth and boost inflation, making it harder to lower the central bank’s benchmark as previously expected

Moody's U.S. downgrade may be politically driven: Standard Chartered

Douglas Boneparth, another CFP and the president of Bone Fide Wealth in New York, agreed that the downgrade could translate to higher interest rates on consumer loans.

“Downgrades can raise borrowing costs over time,” said Boneparth, who is also on CNBC’s FA council.

“Think higher rates on mortgages, credit cards, and personal loans, especially if confidence in U.S. credit weakens further,” he said.

Which consumer loans could see higher rates

Some loans could see more direct impacts because their rates are tied to bond prices.

Since mortgage rates are largely tied to Treasury yields and the economy, “30-year mortgages are going to be most closely correlated, and longer-term rates are already moving higher,” Rehling said.

The average rate for a 30-year, fixed-rate mortgage was 6.92% as of May 16, while the 15-year, fixed-rate is 6.26%, according to Mortgage News Daily. 

Although credit cards and auto loan rates more directly track the federal funds rate, the nation’s financial challenges also play a key role in the Federal Reserve’s stance on interest rates. “The fed funds rate is higher than it would be if the U.S. was in a better fiscal situation,” Rehling said.

Since December 2024, the overnight lending rate has been in a range between 4.25%-4.5%. As a result, the average credit card rate is currently 20.12%, down only slightly from a record 20.79% set last summer, according to Ted Rossman, a senior industry analyst at Bankrate. 

Credit card rates tend to mirror Fed actions, so “higher for longer” would keep the average credit card rate around 20% through the rest of the year, Rossman said.

‘We’ve been through this before’

Before its downgrade, Moody’s was the last of the major credit rating agencies to have the U.S. at the highest possible rating.

Standard & Poor’s downgraded the nation’s credit rating in August 2011, and Fitch Ratings cut it in August 2023. “We’ve been through this before,” Rehling said.

Still, the move highlights the country’s fiscal challenges, Rehling said: “The U.S. still maintains its dominance as the safe haven economy of the world, but it puts some chinks in the armor.”

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Trade tensions spur consumers to spend less on discretionary purchases

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A customer shops in an American Eagle store on April 4, 2025 in Miami, Florida. 

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After a bout of panic buying, more consumers are prepared to rein in their spending and live with less, recent studies show. Even President Donald Trump suggested that Americans should be comfortable with fewer things.

“[Americans] don’t need to have 250 pencils,” Trump said on NBC News’ “Meet the Press.” “They can have five.”

According to a study by Intuit Credit Karma, 83% of consumers said that if their financial situation worsens in the coming months, they will strongly consider cutting back on their non-essential purchases.

Over half of adults, or 54%, said they’ll spend less on travel, dining or live entertainment this year, compared to last year, a new report by Bankrate also found. The site polled nearly 2,500 people in April.

“Moving forward, people may not be able to absorb these higher prices,” said Ted Rossman, Bankrate’s senior industry analyst. “It sort of feels like something has to give.”

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Economy is ‘at a pivot point’

While many Americans are concerned about the effect of on-again, off-again tariff policies, few have changed their spending habits yet. Up until now, that is what has helped the U.S. avoid a recession.

Because it represents a significant portion of Gross Domestic Product and fuels economic growth, consumer spending is considered the backbone of the economy.

“Consumers are still spending despite widespread pessimism fueled by rising tariffs,” said Jack Kleinhenz, chief economist of the National Retail Federation. “While tariffs may have weighed on spending decisions, growth is coming at a moderate pace and consumer spending remains steady, reflecting a resilient economy.”

However, now the economy is “at a pivot point,” according to Kleinhenz.

“Hiring, unemployment, spending and inflation data continue in the right direction, but at a slower pace,” Kleinhenz said in a recent statement. “Everyone is worried, and a lot of people have recession on their minds.”

Most recent Fed Survey shows surging probability of recession

Trump’s tariffs jump started a wave of declining sentiment, which plays a big part in determining how much consumers are willing to spend.

“Any time there is this much uncertainty, people tend to get a little more cautious,” said Matt Schulz, chief credit analyst at LendingTree. 

The Conference Boards’ expectations index, which measures consumers’ short-term outlook, plunged to its lowest level since 2011. The University of Michigan’s consumer survey also showed sentiment sank to the lowest reading since June 2022 and the second lowest in the survey’s history going back to 1952.

“The cumulative effects of inflation and high interest rates have been straining households, contributing to record levels of credit card debt and causing consumer sentiment to plummet,” Rossman said.

Tack on the Trump administration’s resumption of collection efforts on defaulted federal student loans and many Americans, who are already under pressure, will suddenly have less money in their pockets.

As it stands, roughly half — 47% — of U.S. adults would not consider themselves financially prepared for a sudden job loss or lack of income, according to recent data from TD Bank’s financial preparedness report, which polled more than 5,000 people earlier this year.

Another 44% of Americans said they think about their financial preparedness every single day.

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