Finance

Investors with high incomes may not be able to contribute to a Roth or make deductible contributions to a traditional individual retirement account.
However, a strategy called the “backdoor Roth IRA” lets high earners access Roth accounts.
Investors would make a nondeductible contribution to a traditional IRA, and then convert those funds to a Roth account.

Thomas Barwick

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.

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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High earners can contribute to a so-called nondeductible IRA, however.
This is a traditional IRA, but investors don’t get a tax deduction for their contributions; they fund the accounts with after-tax money. Investors owe income taxes on growth later, upon withdrawal.
The ability to use the backdoor Roth IRA is a major benefit of these accounts, tax experts said.
It only applies to investors who make too much money to contribute directly to a Roth IRA or make a tax-deductible contribution to a traditional IRA, Slott said.
Here’s the basic strategy: A high-income investor would make a nondeductible contribution to their traditional IRA and then quickly convert the funds to their Roth IRA.

“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

A nondeductible IRA likely doesn’t make sense for investors who don’t intend to utilize the backdoor Roth strategy, according to financial advisors. In such cases, the investor would just let contributions stay in the nondeductible IRA.
For one, nondeductible IRA contributions carry potentially burdensome administrative and recordkeeping requirements, Slott said.
“It’s a life sentence,” he said.
Taxpayers have to file a Form 8606 to the IRS every year to keep track of their after-tax contributions to a nondeductible IRA, according to Arnold & Mote Wealth Management, based in Hiawatha, Iowa. Withdrawals “add more complexity” to that administrative lift, it added.

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. More

Visa said it plans to launch a dedicated service for account-to-account (A2A) payments, skipping the traditional — and often inflexible — direct debit process.
Visa said consumers will be able to monitor these payments more easily and raise any issues by clicking a button in their banking app.
The product will initially launch in the U.K. in early 2025, with subsequent releases in the Nordic region and elsewhere in Europe later in 2025. 

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Visa said it plans to launch a dedicated service for bank transfers, skipping credit cards and the traditional direct debit process.
Visa, which alongside Mastercard is one of the world’s largest card networks, said Thursday it plans to launch a dedicated service for account-to-account (A2A) payments in Europe next year.

Users will be able set up direct debits — transactions that take funds directly from your bank account — on merchants’ e-commerce stores with just a few clicks.
Visa said consumers will be able to monitor these payments more easily and raise any issues by clicking a button in their banking app, giving them a similar level of protection to when they use their cards.
The service should help people deal with problems like unauthorized auto-renewals of subscriptions, by making it easier for people to reverse direct debit transactions and get their money back, Visa said. It won’t initially apply its A2A service to things like TV streaming services, gym memberships and food boxes, Visa added, but this is planned for the future.
The product will initially launch in the U.K. in early 2025, with subsequent releases in the Nordic region and elsewhere in Europe later in 2025. 

Direct debit headaches

The problem currently is that when a consumer sets up a payment for things like utility bills or childcare, they need to fill in a direct debit form.

But this offers consumers little control, as they have to share their bank details and personal information, which isn’t secure, and have limited control over the payment amount.

The open banking movement is inspiring consumers to ask who owns their banking data

Static direct debits, for example, require advance notice of any changes to the amount taken, meaning you have to either cancel the direct debit and set up a new one or carry out a one-off transfer.
With Visa A2A, consumers will be able to set up variable recurring payments (VRP), a new type of payment that allows people to make and manage recurring payments of varying amounts.
“We want to bring pay-by-bank methods into the 21st century and give consumers choice, peace of mind and a digital experience they know and love,” Mandy Lamb, Visa’s managing director for the U.K. and Ireland, said in a statement Thursday.
“That’s why we are collaborating with UK banks and open banking players, bringing our technology and years of experience in the payments card market to create an open system for A2A payments to thrive.”
Visa’s A2A product relies on a technology called open banking, which requires lenders to provide third-party fintechs with access to consumer banking data.
Open banking has gained popularity over the years, especially in Europe, thanks to regulatory reforms to the banking system.
The technology has enabled new payment services that can link directly to consumers’ bank accounts and authorize payments on their behalf — provided they’ve got permission.
In 2021, Visa acquired Tink, an open banking service, for 1.8 billion euros ($2 billion). The deal came on the heels of an abandoned bid from Visa to buy competing open banking firm Plaid.

Visa’s buyout of Tink was viewed as a way for it to get ahead of the threat from emerging fintechs building products that allow consumers — and merchants — to avoid paying its card transaction fees.
Merchants have long bemoaned Visa and Mastercard’s credit and debit card fees, accusing the companies of inflating so-called interchange fees and barring them from directing people to cheaper alternatives.
In March, the two companies reached a historic $30 billion settlement to reduce their interchange fees — which are taken out of a merchant’s bank account when a shopper uses their card to pay for something.
Visa didn’t share details on how it would monetize its A2A service. By giving merchants the option to bypass cards for payments, there’s a risk that Visa could potentially cannibalize its own card business.
For its part, Visa told CNBC it is and always has been focused on enabling the best ways for people to pay and get paid, whether that’s through a card or non-card transaction. More

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Executive Chairman and CEO of Microsoft Corporation Satya Nadella speaks during the “Microsoft Build: AI Day” event in Bangkok, Thailand, May 1, 2024. 
Chalinee Thirasupa | Reuters

Microsoft’s generative artificial intelligence prospects are impressive. But the stock has more to offer investors than just the new tech. More