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How High-income Earners Can Overcome Common Saving Obstacles Thumbnail

How High-income Earners Can Overcome Common Saving Obstacles


You already know preparing and saving early is key to reaching your retirement goals - but as someone who makes six figures or more, you may have encountered some roadblocks. 

High-income earners face several financial hurdles when it comes to preparing for retirement, as their income can actually limit them from utilizing certain tax-advantaged retirement savings strategies. In fact, 27% of individuals making more than $137,700 annually have no retirement savings.

If you make six figures or more, you know you need to plan now in order to maintain your lifestyle through retirement. Here are a few strategies highly compensated executives and employees like you can implement to save for retirement.

Why Are High-Income Earners at a Disadvantage?

The IRS offers several tax-advantaged retirement savings options. Most of these options, however, offer some sort of income cap - making it harder for high earners to take advantage of these tax-saving strategies. But high earners face the same challenge as moderate- to low-income earning employees: sustain a similar lifestyle in retirement by maintaining financial independence. When high earners are limited in their options for saving for retirement, it can make reaching their goals for retirement more challenging.

Retirement Saving Strategies

Once you’re able to identify the roadblocks you may be facing, explore the retirement saving strategies that may work best for you and your family.

Strategy #1: Contribute to a 401(k) or Roth 401(k)

If you aren’t doing so already, contributing to an employer-sponsored 401(k) plan is an effective place to start saving for retirement. You may defer up to $19,500 (or $26,000 if you’re 50 or older) of your pre-tax earnings toward your employer-sponsored 401(k) plan.1 Many employers will offer matching contributions as well, up to a certain percentage of your contributions. The total contribution limit for a 401(k) plan in 2021 is $58,000 (plus an additional $6,500 for those 50 and older) or 100 percent of an employee’s compensation, whichever is lower.1

The salary limit for deferring compensation is $280,000 for 2021. If you make more than this amount, this doesn’t mean you can’t contribute to your 401(k) plan. Employees can defer compensation to their 401(k) plan throughout the year until their year-to-date earnings reach $280,000. Once that maximum is reached, employees can no longer defer earnings toward their 401(k) plan.1 

As a result, it can help to be strategic about when you make your retirement investments. If possible, contribute up to the limit as early as possible in the year, before you hit $280,000 in income.

As a high earner, your 401(k) will likely offer the highest contribution cap for tax-deferred retirement savings - making it an important cornerstone of your retirement saving strategy.

You typically cannot contribute to a Roth IRA as a high-income individual. You can, however, contribute to a Roth 401(k). There are no income limits on highly compensated employees contributing to a Roth 401(k).

Strategy #2: Contribute to a Traditional IRA 

Roth IRAs allow retirees to make tax-free withdrawals in retirement, meaning they can be appealing for those saving for retirement. Unfortunately, it may not be an option for some high-earners. If your modified adjusted gross income is more than $140,000 as a single filer or $208,000 as a joint filer, you are not eligible to contribute after-tax dollars to a Roth IRA account. If you make between $125,000 and $140,000 as a single filer or $198,000 and $208,000 as a joint filer, you may be eligible to contribute a reduced amount.2

A traditional IRA, however, does not have an income limit, which makes it an available option for high earners. The only prerequisite is that you earn any income at all. It’s important to note, however, that you may be limited to how much of your IRA contribution you can deduct on your tax return.

How much you are able to deduct from your taxes will depend primarily on two things:3  

  • Your modified adjusted gross income

  • Whether or not you actively contribute to your employer-sponsored retirement plan (such as a 401(k))

Strategy #3: Contribute to a Backdoor Roth IRA

Building on the strategy above, those interested in tax-free withdrawals in retirement - but aren't eligible to utilize a Roth IRA - may benefit from a backdoor Roth IRA. As the name suggests, this strategy offers high-income earners a roundabout entrance into placing their after-tax dollars into a Roth IRA account.

To do this, you'll have to:

  1. Open and contribute to a traditional IRA account.

  2. Have an account administrator provide the paperwork and instructions for converting your traditional account into a Roth IRA.

  3. Prepare to pay taxes on the money in the account and any gains it may have incurred.

If this sounds like an option you may be interested in pursuing, reach out for more guidance and instruction regarding this process.

Strategy #4: Maximise HSA Contributions

This isn’t a valid strategy for everyone, but if you have a health savings account, utilizing it can be an effective way to save more for retirement. You need to have a high-deductible health insurance plan in order to use an HSA. However, if you qualify, money in an HSA is tax-deductible, earnings are tax-deferred, and withdrawals are tax-free if used for qualified medical expenses.

As you get older, your medical expense category is likely to expand. Utilizing a health savings account can help offset those expenses in retirement without the typical taxes associated with savings accounts. 

Strategy #5: Utilize Bank-Financed Insurance & Investment Opportunities

For high-income earners, bank-financed insurance and investment opportunities can provide a great way to make up the retirement gap. With bank-financed investing, you’re able to leverage capital from a bank up-front, like you would with a mortgage. This allows you to buy increased insurance and retirement benefits, making your money work harder.

If you’re earning six figures or more, it may be helpful to work with a financial advisor or retirement specialist who can help you understand your savings options. Depending on your age, goals for retirement, and current financial standings, together you may determine a more aggressive strategy, such as a taxable investment account, may be a viable option. Whatever strategy you choose, be sure to stay up-to-date on contribution limits and eligibility requirements. This can help you and your retirement savings avoid any surprise tax bills now or toward retirement.

  1. https://www.irs.gov/retirement-plans/401k-plans-deferrals-and-matching-when-compensation-exceeds-the-annual-limit#:~:text=The%20annual%20limits%20are%3A,401(a)(17))

  2. https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2021

  3. https://www.irs.gov/publications/p590a


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Investors should be aware that investing based upon a strategy or strategies does not assure a profit or guarantee against loss.

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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