High Income Federal Employees Have Options for Funding Roth IRAs: Part II

This is the second of two columns discussing how federal employees can fund their Roth IRAs. A Roth IRA is one of the most powerful retirement savings strategies available. Together with their Roth TSP account, federal employees can save for their future retirement in a tax-free way.

However, those federal employees who are high earners may be limited or even barred from contributing to a Roth IRA. Fortunately for high earning federal employees, there are opportunities besides direct contributions that will allow high earning federal employees to fund their Roth IRAs. The first column discussed two of these ways; namely, a Roth IRA conversion and the ‘backdoor” Roth IRA. This column outlines three other methods: (1) Internal Revenue Code Section 529 College Savings Plan rollovers to Roth IRAs; (2) Expanded Roth retirement plan opportunities; and (3) Mandatory Roth retirement plan contributions.

SEE ALSO: High Income Federal Employees Have Options for Funding Roth IRAs: Part I

Section 529 College Savings Plan Rollovers

One of the provisions passed into law as part of SECURE Act 2.0 allows tax-free rollovers from an Internal Revenue Code (IRC) 529 College Savings Plan to a Roth IRA. This opportunity became available on January 1, 2024. The maximum lifetime rollover amount per beneficiary is $35,000. These rollovers are subject to the following limitations:

1. Annual rollover amounts are subject to the annual Roth IRA contribution limits. This means that during 2025 only rollover amounts up to $7,000 – the Roth IRA contributions limit during 2025 for individuals younger than age 50 during 2025 – can be rolled over from a 529 College Savings Plan to a Roth IRA.

2. Any actual Roth IRA or traditional IRA contribution made by the 529 plan beneficiary would count against the permitted rollover amount that year. For example, if Jane is an IRC Section 529 College Savings plan beneficiary and Jane contributes $3,000 to her existing Roth IRA during 2025, then the maximum that Jane can rollover from her IRC Section 529 College Savings plan to her Roth IRA during 2025 is $7,000 less $3,000, or $4,000.

3. The 529 plan beneficiary must have earned income (salary/wages) in the year of the rollover equal to the amount being rolled over. However, unlike Roth IRA contribution requirements, there are no income limits restricting the 529 plan-to-Roth IRA rollover. Thus, this rollover can be considered a “side door” Roth IRA opportunity for high earning 529 plan beneficiaries. The following example illustrates:

Sandra is a federal employee and is 36 years old. When Sandra was younger, her parents made contributions to an IRC Section 529 College Savings plan for her. Sandra received a scholarship to college and did not need all the funds in the 529 plan. In 2025, Sandra can rollover $7,000 from the 529 plan to a Roth IRA. Sandra has a $180,000 salary with the federal government and therefore satisfies the earned-income requirement to contribute to a Roth IRA. The fact that Sandra’s MAGI exceeds $165,000 does not disqualify her from rolling over $7,000 of her IRC Section 529 College Savings plan assets into her Roth IRA.

New Roth Retirement Plan Funding Opportunities

1. Roth 401(k) employer-sponsored retirement plan accounts first became available in 2006. The Roth TSP retirement account became available to federal employees starting in 2012. Since then, more private employers have offered the Roth retirement account option. Unlike Roth IRA contribution restrictions, no income limits apply to Roth retirement plan contributions.

2. Contributing to a Roth retirement plan like the Roth TSP does not affect an individual’s ability to still make either traditional or Roth IRA contributions.

3. No income limitations or other restrictions for directly rolling over Roth retirement funds into a Roth IRA.

Mandatory Roth “Catch-Up” Contributions

A provision passed as part of SECURE Act 2.0 will take effect January 1, 2026. The provision will require any “catch-up” retirement plan contributions made by employees earning above a certain dollar amount to be put into their Roth accounts. This is the case even if high earning employees would prefer to contribute to the traditional accounts in order to save on current-year taxes.

For federal employees who are high earners, the income limitations on direct Roth IRA contributions are a hurdle that can be overcome by a variety of options for funding the Roth IRA, as presented in these past two MFR columns. In recent years, Congress has expanded these options and will continue to do so as it seeks immediate tax revenue.