Hi, I have been contributing the max to a Roth IRA for the past couple of years but I was recently promoted which came with a sizable pay increase. This has decreased the amount I am able to contribute per year. I’m aware that I have to remove any excess contributions. My question now is whether I should invest the extra money into a traditional IRA or a brokerage account. I am maxed out on my workplace 401k.
Hi @jjgreen!! Thank you for your question and congrats on the promotion! That’s very exciting!
That’s good that you are maxing out your 401k. A backdoor Roth IRA might be something to consider since there are no income limitations on this. This will only work well if you don’t have existing traditional IRA assets or else you may have to deal with the pro rata rule, which is not ideal.
If you can’t do a backdoor Roth IRA, either a traditional IRA or brokerage account would be good options. Keep in mind, depending on your income, you will probably not get a tax deduction for traditional IRA contributions since you are likely over the income limit. But if you are saving the money for retirement, a traditional IRA is still the best route since it grows tax deferred. If you are planning to use the money earlier than retirement age, than a brokerage account is the best option!
I hope this helps. Let us know if there is anything else!