To Inform:

What is a Roth IRA?

A Roth IRA (Individual Retirement Account) is a personal retirement account where you can add funds that you have already paid taxes on. The benefit of contributing to a Roth IRA is that since you have already paid tax on these funds, they can “grow and go” tax free – meaning all earnings in the account are tax free as well as withdrawals. There are some stipulations around this including when you can withdrawal the funds, how much you can contribute, and how much you can make to contribute.

For all earnings in the account, you must wait until you are 59 ½ to avoid paying ordinary income tax and a 10% penalty for an early withdrawal. You can always take out the money that you have contributed without facing tax and penalty.

The contribution limit for a Roth IRA varies year by year depending on what the IRS establishes. For 2026, individuals that are under 50 years old and have earned income can contribute up to $7,500. If you are older than 50 years old and have earned income, you are eligible to contribute an additional $1,100, for a total of $8,600. The key here is having earned income, as individuals can only contribute up to earned income (e.g., if you earn $5,000 of income, you can contribute up to $5,000 to a Roth IRA).

The IRS also puts income limits to contribute to a Roth IRA. For 2026, single filers making over $168,000 and married filers making over $252,000 cannot contribute directly to a Roth IRA.

Backdoor Roth

Luckily, if you make over the above income limits, there is still a way for you to contribute to a Roth IRA through something called a “backdoor Roth.” A backdoor Roth allows you to bypass the income limits by first pushing dollars into an IRA before converting the money to Roth. Typically, when you contribute to an IRA, you are awarded a tax deduction for those dollars, but with a backdoor Roth, you forfeit that tax deduction to reap the benefits of the dollars growing tax free in your Roth.

One key caveat if you want to complete a backdoor Roth is that you must not have any other pools of pre-tax money. If you have balances in an IRA, SEP IRA, or SIMPLE IRA, the IRS combines all these balances into one big pot. Attempting a backdoor Roth while having existing pre-tax balances could result in double taxation of the contribution that you make. This is called the “Pro-Rata rule.”

Mega Backdoor Roth

For high income earners, you may be able to put even more dollars into Roth through your company’s retirement program. A mega backdoor Roth usually makes sense when an individual either makes too much to contribute to a Roth IRA directly or when someone has already contributed the maximum amount to their 401(k). This feature is plan specific, so it is important that you verify with your company’s retirement plan before moving forward with this strategy. The plan must let you do the following two things:

• Make after-tax contributions
• Take in-service distributions

It’s important to note that after-tax contributions are not the same as Roth contributions – hence the need to convert the funds. These after-tax contributions are separate, annual additions from any salary deferrals.

The standard 2026 employee contribution limit for retirement plans is $24,500, while the IRS limits annual additions to $72,000.

• Employee contributions – $24,500
• Employer contributions (employer match) – $7,500
• Total contributions for 2026 – $32,000

Since the annual additions limit is $72,000, there is still $40,000 of room for an employee to make these after-tax contributions.

It is important to remember to convert the funds from after-tax to Roth. While you have already paid taxes on these after-tax funds, any growth on these after-tax funds can be taxable, so by converting to Roth quickly, you will avoid seeing any growth.

Roth IRAs are great tools to lock in tax free growth for your dollars. It is important to understand how they work, how you can contribute, other strategies to get dollars into the Roth structure, and if they make sense for you in your financial plan.

Written by Zach Granger, Wealth Advisory Associate