Skip to content

Retirement Saving Strategies for High Income Earners [Video + Free PDF]

by Financial Design Studio, Inc. / October 5, 2020

One of the most common questions we get from high earning business owners and corporate executives is: how can I be saving more money for retirement?

Let’s consider the 401(k) limits for 2020. You can put $19,500 ($26,000 if over the age of 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 live in retirement comfortably. In this video and post, we’ll look at retirement saving strategies and tax saving tips for high income earners. 

Retirement & Tax Saving Options for High Income Earners

As you can see from the video, we have several of options for retirement saving strategies for high income earners. You have to be very careful, so please work with a financial professional or tax accountant before changing retirement accounts or acting on any other options below. 

1.  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.

2.  Backdoor Roth

Another retirement plan strategy that we consider is called a “Backdoor Roth”. High earners are likely going to exceed the limits where you can get a tax deduction for making an IRA contribution. However, you can 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. 

3.  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!

4.  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 is that 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.

Free Strategy Guide: Retirement Savings for High Income Earners

Free PDF download: Retirement Savings Strategies for High Income Earners

Click Here to Download!

Download our full guide here to for more info on tax planning and retirement savings strategies for high income earners. When you’re ready to get started, we’re here to help you make the most of your income, investments and savings.

 

 

 

 

Ready to find out more?

Contact us today for a free 30-minute consultation!

Recommended Reading

Social Security Cost of Living

Big Social Security Cost of Living Increase Expected in 2021

Will the Social Security Cost of Living Adjustment keep up with inflation in 2021? Our estimate is that the cost of living adjustment in 2021 will be one of the highest in recent decades.

inflation transitory

Is Inflation Transitory or Not?

The important question in the investment world is: Is inflation transitory or not? Whether inflation ends up running hot or cold can make a big difference in how markets perform. Read about our thoughts regarding this all-important question.

Financial Design Studio, Inc.

We are financial advisors in Deer Park and Barrington, IL. A team with a passion for helping others design a path to financial success — whatever success means for you. Each of our unique insights fit together to create broad expertise, complete roadmaps, and creative solutions. We have seen the power of having a financial plan, and adjusting that plan to life. The result? Freedom from worrying about the future so you can enjoy today.