It’s understandable that some ultrahigh-net-worth individuals believe Roth IRAs are “not for them.” After all, in my experience, many UHNW people are not fixated on saving for retirement. However, by dismissing Roth IRAs, they are inadvertently missing out on a powerful estate planning and wealth transfer tool.
With federal income tax rates scheduled to increase on Jan. 1, 2026, after the sunset of the Tax Cuts and Jobs Act (the highest income tax rates will increase from 37% to 39.6% unless Congress acts), there is good reason now to reconsider or explore for the first time how a Roth IRA can support your overall estate planning strategy.
1. Tax-Free Withdrawals
As a refresher, a Roth IRA is a tax-advantaged retirement savings plan that allows for tax-free withdrawals of contributions and earnings after age 59 ½ (assuming the account has been open for five years). However, contributions to a Roth IRA are made with after-tax dollars and are not tax-deductible in the current year. In short, the Roth IRA tax savings power comes when you draw funds from the account, instead of when you contribute.
2. No Required Minimum Distributions
Assuming income tax rates increase as scheduled for the highest earners, a Roth IRA is likely a better alternative to a traditional IRA. In addition, Roth IRAs do not require any withdrawals, which have the potential to push individuals into higher tax brackets, until after the death of the account owner. That is where the real impact comes into play for UHNW individuals and families.
3. Estate Planning Benefits
It’s worth repeating that all assets in a Roth IRA are allowed to grow tax-free throughout one’s lifetime. Since many UHNW individuals don’t need their Roth IRA assets to fund their lifestyles, that money can be left for decades to compound tax-free. Once the account holder passes on, that person’s beneficiaries can inherit and withdraw the funds without incurring income tax (which they must do within 10 years). With a traditional IRA, beneficiaries must pay income tax on withdrawals.
All in all, a Roth IRA presents a powerful tax mitigation and wealth transfer strategy for wealthy individuals and couples.
4. No Income Limits With A Roth 401(k)
The income limit for contributing to a Roth IRA in 2024 kicks in once an individual’s modified adjusted gross income hits $161,000, or $240,000 for married filing jointly. (Note that there are no longer income limits for converting a traditional IRA to a Roth IRA.)
However, there are no income limits for contributing to a Roth 401(k), making it a great option for UHNW individuals. In addition, beginning in 2024, employers can now fund matches in Roth 401(k)s. Plus, required minimum distributions are no longer required from Roth 401(k)s starting this year, thanks to the SECURE Act 2.0.
5. Benefits Of A ‘Backdoor’ Roth IRA
High-income earners can also leverage the backdoor Roth IRA strategy, where they contribute to a nondeductible traditional IRA and then convert those funds to a Roth IRA. This method bypasses the income limits on direct Roth IRA contributions, enabling wealthy individuals to reap the benefits of a Roth IRA regardless of their income level.
Building off the backdoor Roth IRA concept is the “mega” backdoor Roth IRA, which involves making after-tax contributions (subject to the annual deferred contribution plan limit of $69,000 for 2024, or $76,500 for those age 50 or older) to a 401(k) plan, which can then be rolled over into a Roth IRA. Once after-tax contributions are made, most plans allow for an “in-plan Roth conversion” to allow those funds and related earnings to grow tax-free.
For those who are maximizing their pre-tax or Roth 401(k) contributions and have excess savings capacity, a mega backdoor Roth conversion can be a smart strategy, assuming the employer’s retirement plan allows for it.
However, before following this strategy, it’s important to plan for taxes on the conversion. For example, my firm works with a C-suite executive who had a significant bonus and maxed out all of her available pre-tax retirement vehicles, but she still had enough excess cash on hand after funding her other savings targets to pay for the income tax on the transfer of her pre-tax contributions and untaxed account earnings associated with a mega backdoor Roth 401(k) conversion.
As a relatively young C-suite executive, she was well positioned to realize tax savings on her Roth 401(k) over the years, which will significantly outweigh the one-time income tax hit on the transfer of her pre-tax contribution amount associated with the conversion. That is just one example of how mega backdoor Roth 401(k) conversions can work for relatively younger, high-earning C-suite executives.
Taxes can also be mitigated by making a donation/gift to a charitable remainder trust or donor-advised fund in the same year as making a mega backdoor Roth conversion.
In conclusion, investing in a Roth IRA makes strategic sense for many wealthy individuals due to its tax-free growth, lack of RMDs, estate planning advantages and tax diversification benefits.