Roth IRA is the 'gold standard' of retirement accounts, and high earners can funnel money into it.

• By contributing to a traditional IRA, investors can make a nondeductible contribution, which can later be converted to a Roth account.

The income limits set by U.S. tax law for breaks associated with certain tax-advantaged accounts, such as Roth and traditional IRAs, may present a challenge for investors who have already contributed the maximum amount allowed to their 401(k) plans and are looking for additional tax-sheltered investment opportunities.

The wealthy can use a backdoor Roth IRA as an alternative to traditional retirement savings plans.

The IRS's last resort method for collecting overdue taxes is: How investors can prepare for lower interest rates: This RMD strategy can help investors avoid IRA penalties:

Tax-free investment growth and withdrawals in retirement make Roth accounts especially appealing to investors, according to tax experts.

IRA access, tax breaks can phase out for high earners

For 2024, the annual contribution limit for IRAs is $7,000. Individuals aged 50 and above can add an additional $1,000, resulting in a total contribution of $8,000.

Although many high earners are eligible for tax-advantaged accounts, they often fail to utilize them effectively.

If a married couple files a joint tax return and their modified adjusted gross income is $240,000 or more, they won't be able to contribute to a Roth IRA in 2024. The income threshold for single filers is $161,000. However, eligibility starts to phase out even before these dollar thresholds, reducing the amount investors can contribute.

Those with access to a workplace retirement plan like a 401(k) have income limits on deductibility for pretax (traditional) IRAs.

If you are a single filer with an income of $87,000 or more in 2024 and have a retirement plan at work, you won't receive a tax deduction for contributions to a traditional IRA.

If you and your spouse are filing jointly, you may not be eligible for an IRA deduction if your combined income exceeds $240,000. If only one of you participates in a workplace 401(k), the deduction limit is $143,000. However, you may still receive a partial deduction if your income falls below these thresholds due to income phaseouts.

The 'only reason' to save in a nondeductible IRA

High earners can contribute to a so-called nondeductible IRA, however.

Tax experts said that a significant advantage of these accounts is the ability to use the backdoor Roth IRA.

Slott stated that only investors who earn too much money to contribute directly to a Roth IRA or make tax-deductible contributions to a traditional IRA are affected by this rule.

An investor with a high income would contribute to their traditional IRA and then promptly convert the funds to their Roth IRA.

"The only reason for doing a nondeductible IRA is to perform a backdoor Roth," Slott stated.

Some investors may benefit from a strategy known as the mega backdoor Roth conversion, which involves converting after-tax 401(k) contributions to a Roth account. However, this strategy is not accessible to everyone.

If high wage earners can't set up a Roth IRA, they should consider both a backdoor Roth IRA and a mega backdoor Roth IRA, according to Ted Jenkin, a certified financial planner and founder of oXYGen Financial in Atlanta. He is also a member of the CNBC Financial Advisor Council.

When a nondeductible IRA doesn't make sense

Financial advisors suggest that a nondeductible IRA may not be suitable for investors who do not plan to use the backdoor Roth strategy. In such cases, it would be better for the investor to let their contributions remain in the nondeductible IRA.

Nondeductible IRA contributions may come with administrative and recordkeeping burdens, according to Slott.

"It's a life sentence," he said.

Filing Form 8606 to the IRS annually is necessary for taxpayers to monitor their after-tax contributions to a nondeductible IRA, according to Arnold & Mote Wealth Management in Hiawatha, Iowa. Withdrawals from these accounts add more complexity to the administrative burden, the firm noted.

Why taxable brokerage accounts 'are probably better'

In most aspects, "taxable brokerage accounts are probably better," according to Slott.

Generally, investors who keep their stocks in a taxable brokerage account for over a year are eligible for a lower tax rate on their profits compared to other sources of income.

The federal tax rate for long-term capital gains, which is only imposed when an investor sells their asset, can reach up to 20%. Additionally, high-income earners may also have to pay a 3.8% "Medicare surtax" on their profits.

Nondeductible IRA investors face higher tax rates on earnings withdrawal compared to the top marginal income tax rate of 37%.

Although taxable brokerage account investors pay taxes on dividend income annually, the relative tax benefits of such accounts usually outweigh the taxes paid, advisors stated.

"According to Arnold & Mote Wealth Management, the tax deferral of non-deductible IRAs can be advantageous for some individuals. However, they note that this situation is quite uncommon."

While investors in taxable brokerage accounts can usually withdraw their funds at any time without penalty, individuals with IRAs may face tax penalties if they access their earnings before the age of 59½, except for certain exceptions.

Unlike traditional and nondeductible IRAs, taxable accounts do not require minimum distributions while the account holder is still alive.

A taxable account offers the flexibility to add and withdraw money with minimal restrictions, penalties, or limits, according to Judith Ward, a certified financial planner at T. Rowe Price, an asset management firm.