How High-Income Earners Can Maximize Their Retirement Savings

One of the most common questions we get from high-income earners and corporate executives is: how can I be saving more money for retirement? If you look at the 401(k) limits for 2021, you can put $19,500 ($26,000 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.

2 Investment Options

The question is how can you be saving more? We have a couple of suggestions, but it ultimately depends on your own situation, as they are all unique. The information below is a starting point for discussions with your financial professional based on your situation.

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1. Roth Conversions

One strategy that we consider is called a “Roth Conversion.” High-income earners are likely going to exceed the income limits, outlined by the IRS, to receive a tax deduction for a contribution into an IRA. However, that doesn’t mean you can’t still contribute to your IRA. If you are exceeding those income limits, then any contribution(s) made into an IRA are classified as non-deductible.  What we can do in certain circumstances is take that non-deductible contribution from your IRA and convert that to a Roth IRA. The benefit is that Roth IRAs grow tax-free. When you take money out of a Roth IRA, you don’t have to pay taxes on it unlike a traditional IRA where you do. 

Graphic explaining the backdoor Roth strategy.

2. Taxable Account

Another option is a taxable account. This is the brokerage investment account that you can open up at a custodian like TD Ameritrade. The key here though is while there are no contribution limits, you will want to make sure it’s invested in a tax efficient manner. The contribution basis is not taxed, as it is “after-tax” dollars, but the growth is taxed at two different rates – short-term and long-term capital gains rates. We recommend speaking to an experienced and credentialed wealth advisor before partaking in any of these options to ensure you are obtaining the maximum value from the most appropriate strategy for you.

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