Download the “5 Retirement Savings Strategies for High Income Earners”

Saving Strategies for High Income Earners

One of the biggest questions we get from high earning business owners and corporate executives is: how can I be saving more money?  If you look at the 401(k) limits for 2020 you can put $19,500($26000 if over 50) into your 401(k) pre-tax.  While that is a good amount, depending on your expected retirement lifestyle, that may not be enough for you to be able to live in retirement comfortably.  The question is how can you be saving more?  We have a couple of options and I will preface all this by saying you have to be very careful, so please work with a financial professional or tax accountant before you do all this.  Here are some options to think about:  

Health Savings Account (HSA):
The first option is a Health Savings Account(HSA) . This is important given the cost of healthcare in retirement, we are living longer, and nursing care is becoming more and more expensive.  It’s really important to think about your healthcare costs in retirement as a separate expense, other than your normal living expenses.  The great thing is that when you take money out of the HSA for medical purposes, the distributions/withdrawals are not taxable. To the extent you have an HSA available to you, we recommend maxing out contributions so that when you’re in retirement, you will have a dedicated pool of money to be able to pay those medical expenses.

Backdoor Roth:
Another strategy that we consider is called a “Backdoor Roth”.  High income earners are likely going to exceed the limits where you can get a tax deduction for making an IRA contribution.  However, that doesn’t mean you can’t still contribute to your IRA.  Any contribution(s) are classified as non-deductible instead.  What we can do in certain circumstances is actually take that non-deductible contribution from your IRA and convert that to a Roth IRA.  The benefit is that Roth IRAs grow tax-free and when you take money out of a Roth IRA you don’t have to pay taxes on it like you do out of a traditional IRA.  

Mega Backdoor Roth:
Another strategy, similar to a backdoor Roth, is called a “Mega backdoor Roth” conversion.  In this case you are putting after-tax money into your 401(k) plan.  We know that for 2020 the limit for pre-tax contributions to a 401(k) is $19,500($26,000 if over 50), but you can actually put up to $57,000 into that 401(k) plan between your pre-tax contributions, your company match, and after tax contributions.  The strategy is completely dependent upon if your plan allows it.  To the extent you contribute after tax money, you can roll these funds directly into a Roth IRA once you leave the company or while still employed if in -service rollovers are permitted.  This can be a great way to save a lot of extra money and additionally benefit from the money being a Roth account!

Taxable Account:
The last thing we look at is the good old taxable account. This is the brokerage investment account that you can open up at a custodian like Schwab. The key here though is while there are no contribution limits, you want to make sure it’s invested in a tax efficient manner.  Investing in passive index funds that don’t pay out year-end capital gains distributions, owning municipal bond funds, and other asset location strategies will help make sure that while you are investing you are not paying a lot of taxes as well.

We’ve actually created a guide looking at all of these different strategies and going into a little more detail.  If you go to our website or look in the link below this video you can download our guide and we will run through each of these strategies in more detail. If there is anything we can help you with to make your life a little easier and plan this all out for you we are here to help you!…(read more)

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High income earners often have a unique set of financial challenges. They may struggle with finding ways to save money that are appropriate for their income level. However, with careful planning and attention to detail, high income earners can find effective ways to save money.

One way to save is to focus on your spending habits. While it may be tempting to upgrade your lifestyle when your income increases, it’s important to consider the long-term impact. Prioritize saving for your future by putting money toward retirement accounts, such as an IRA or 401(k).

Another strategy is to reduce unnecessary expenses. Review your spending habits and identify areas where you can cut back. For example, consider reducing dining out or limiting excessive purchases on items that are not essential. Even small changes can add up over time and make a significant difference in your overall savings.

Investing in real estate is another smart strategy that can help high income earners save. Consider investing in rental properties, which can provide passive income over time. This can be a smart way to diversify your portfolio and earn a steady stream of passive income.

It’s also important to consider taxes when saving. Speak with a knowledgeable tax advisor to identify strategies that can help reduce your tax burden. For example, contributing to tax-deferred retirement accounts or making charitable donations can reduce your taxable income and provide additional financial benefits.

Finally, consider working with a financial planner who can help identify additional strategies for saving. A planner can help you create a personalized plan that is tailored to your unique financial situation and help you stay on track with your goals.

In conclusion, high income earners face unique financial challenges and may require additional strategies to effectively save for the future. Prioritizing spending habits, cutting back on unnecessary expenses, investing in real estate, considering tax strategies, and working with a financial planner can all be effective ways to save money and build wealth over time. By taking a proactive approach to your finances, you can set yourself up for success and achieve your long-term financial goals.