Higher earners can look to their employers’ 401(k) or similar plan. More and more companies are offering a Roth 401(k) option. There are no income limits on 401s, and you can put in up to $16,500 annually.

If you’re self employed, you have a couple of options. You can contribute up to 25% of your annual profit and that contribution reduces your taxable income. There is no Roth option with a SEP IRA however.

The other option if you are self employed with no employees is a solo 401(k), which may allow Roth contributions and has higher contribution limits ($16,500 of your salary and up to 25% of your profit). Here’s some more info from Fidelity:

https://www.fidelity.com/retirement/small-business/self-employed-401k

(Not necessarily an endorsement of Fidelity but a quick link I found with some more info). As for figuring out which one is right for you when you hit that income level, it’s probably a more sophisticated analysis that I can do in a blog comment and a good conversation to have with a tax advisor or financial planner. Good luck.

I very much enjoy your website, and despite this being an older post, I’m looking seriously into the Roth IRA at the moment. I currently earn below the income limit of 105,000, which would allow me to contribute. What I’m struggling to find, however, is information as to what happens once you reach the income limit? My current belief is that you simply cannot contribute any further to the account. Is this real? Are there better strategies out there for higher earnings?

Regards,
Carson Boddicker

In 2011, the contribution max is $16,500 for everybody 50 and under. (If you’re over 50 you can make an addition $5,500 catch up contributions).

The downside to any 401(k) is you usually must invest in a small number of funds offered by your employer’s 401(k) plan provider. With an IRA, you can invest in anything you want.

Would you also be able to invest in your choice of mutual funds instead of 10 or so preselected by your employer if you were to get them from a firm outside of your company (i.e. T. Rowe Price, Vanguard, etc)?

Whether or not you decide to make that rollover into a traditional or Roth IRA is totally up to you. I recommend having both ultimately, and maybe even at different brokerages.

Keeping the 401(k) can be limiting and risky. It is limiting because you cannot make further contributions to the account since you have left your former employer. It is risky because if your employer decides to close their plan with the brokerage (they go out of business, for example) your balance may be sent to you in a lump sum payment, at their discretion, causing you the hassle of the penalties and taxes. Save yourself the hassle of scrambling to deal with that and make the change of your own accord, as you will be more informed if you plan ahead.

A. Roll over the Chuck Schwab 401K into a traditional IRA at Fidelity
B. Roll over Chuck Scwab 401K into a Roth at Fidelity
C. Keep 401K as is and continue letting it grow with the market (it’s allocated almost entirely in stocks and funds).

Any thoughts?