I will be starting a job on Monday that yearly will net me in excess of 120k. I know that this income exceeds the maximum earnings for a Roth IRA and I'm sure other things. I'm a complete newbie when it comes to retirement investment, so what are my options and what are the pros and cons of each option?

I file as Single on my taxes.

  • 1
    Does the job have a 401k plan? You should be eligible for that. – JohnFx Aug 13 '10 at 20:32
  • 1
    It does and I had planned to contribute to it, but a lot of the advice I have found is "Contribute to the 401k until you match. Then contribute to a Roth IRA." So I'm wondering whether this advice still applies. – Drew Aug 13 '10 at 21:36
  • @Drew I think that is generally good advice but not in your case because you will make too much. darn :-) – mpenrow Aug 13 '10 at 21:38
  • 2
    I think the rules becomes, contribute as much as you can to the 401k, until you reach the contribution limit. – KeithB Aug 14 '10 at 13:10

All data for a single adult in tax year 2010.

Roth IRA

  • Full contribution allowed for AGI under $105K
  • Partial contribution allowed for AGI between $105K and $120K
  • No contribution allowed for AGI over $120K


  • IRS allows up to $16,500 but varies based on employer and plan details.

Roth 401k

  • IRS allows up to $16,500, but varies based on employer and plan details.

Traditional IRA and your employer offers a 401k

  • Phased out at $66,000.

Traditional IRA and your employer does NOT offer a 401k

  • No income/AGI limit. Your full IRA contribution (up to $5K) can be made and deducted from your taxes similar to a 401k.

So, here are your options.

If you have a 401k at work, you could max that out. If you make close to $120K, you could reduce your AGI enough to contribute to a Roth IRA.

If you do not have a 401k at work, you could contribute to a Traditional IRA and deduct the $5K from your AGI similar to how a 401k works.

Other than that, I think you are looking at investing outside of a retirement plan which means more flexibility, but no tax advantage.

  • 4
    AGI is Adjusted Gross Income, for anyone that has never heard of it, like me. en.wikipedia.org/wiki/Adjusted_Gross_Income – bob esponja Aug 14 '10 at 21:33
  • The "Phased out at $66,000" is missing an all-important word, Deduction. The Traditional IRA itself can still be used (and likely should, as the first step in a backdoor Roth IRA contribution) – Ben Voigt Dec 27 '19 at 17:12

Put in the maximum you can into the 401(k), the limit should be $16,500 so long as the highly compensated rules don't kick in. Since you cannot deduct the traditional IRA, it's a great option to deposit to a traditional IRA and immediately convert that balance to a Roth account. That puts you at $21,500/yr saved, nearly 18%. There's nothing stopping you from investing outside these accounts. A nice ETF with low expenses, investing in a stock index (I am thinking SPY for the S&P 500) is great to accumulate long term.


First off, high five on the paycheck. There are a few retirement issues to deal with.

401k issues - At that income level, you will probably fall into the "Highly Compensated Employee" category, which means things get a little more complicated, both for you and your employer. (Wikipedia link)

IRA issues - As you already realized, you make too much to directly open and contribute to a Roth IRA. You can open a Traditional IRA, however. Your income is already over the limit for Traditional IRA deduction (bummer), so it would seem there is little point to opening an IRA at all.

However, there is a way to take advantage of a Roth IRA, even at your income level. It is possible to convert a Traditional IRA into a Roth IRA. There used to be income limits on the ability to do the conversion, which would have normally made this off limits to you. Starting in 2010, the income limit is removed, so you can do this.

Basically, you open a Traditional IRA, max it out, then convert it to a Roth. Since there was no income deduction, you shouldn't have to pay any more taxes. (link)

Disclaimer: I've never tried this, nor do I know anyone who has, so you might want to research it a bit more before you try it yourself.

  • 1
    Whether he will Highly Compensated Employee Limit greatly depends on the company. As a top manager at a small company, its likely. If he is, for example, at a large national firm there are probably plenty of people who make significantly more. But something for him to look into. – KeithB Aug 14 '10 at 13:13
  • I believe if you rollover a 401k to a Roth IRA in 2010 you have to pay taxes on that conversion within the next 2 years, in 2011 and 2012. I'm not sure if you rollover a traditional IRA if this rule till holds, but I'd highly recommend looking into this. – CrimsonX Aug 24 '10 at 17:59

There are three common options for you:

  1. Max out your 401(k) to $16,500 with pre-tax money
  2. Setup a traditional IRA without the tax benefit and a Roth IRA account. Put your money into the traditional IRA. Then, as of this year, you can roll whatever you want from a traditional IRA into a Roth IRA.
  3. Take advantage of your employer's HSA (if offered) by contributing $3,050 a year. Money in the account can be used tax-free for medical expenses. Any money left over at retirement can be withdrawn in a manner similar to a traditional IRA
  • what is the benefit of HSA account? does that also grow over time? or is it the same amount 40 years later – Dzt Sep 15 '14 at 8:10

The other alternative: just invest it in tax-efficient investments.

You will have limited tax-deferral options outside of your 401k, but don't let that limit you. You can invest in a variety of ETFs, stocks and mutual funds for growth, and tax-free investments like municipal bonds as you get older and need to draw income.


You can contribute to a Traditional IRA instead of a Roth. The main difference is a contribution to a Roth is made with after tax money but at retirement you can withdraw the money tax free. With a Traditional IRA your contribution is tax-deductible but at retirement the withdrawal is not tax free. This is why most people prefer a Roth if they can contribute.

You can also contribute to your work's 401k plan assuming they have one. And you can always save for retirement in a regular account.

  • 4
    This is not an option at his income level. The IRA deduction is phased out at some point. – KeithB Aug 14 '10 at 13:07

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.