You are the CEO of your retirement. It is up to you to take charge! And if you follow our advice, taking charge entails investing 2015% of your income in tax-favored retirement accounts like 401(k)s and IRAs.
However, in the event that you are an actual CEO or someone else who earns a high income, you will have a problem (a really good problem) because you make so much money that you are able to max out those tax-favored accounts that you won’t even approach hitting that 2015% mark.
If you make a lot of money, you don’t have to limit your contributions to tax-favored accounts. There are many other ways to continue building wealth.
But before we go any further, keep in mind that Baby Step 4 of the 7 Baby Steps is saving for retirement. It is recommended that you have no debt (apart from your house) and a fully funded emergency fund before you begin saving for retirement in 2015.
The tried-and-true method for accumulating wealth and leaving a legacy for future generations is to “Take Baby Steps.” Actually, a unique set of people have followed our strategy and in around 20 years amassed a million-dollar net worth. We like to call them Baby Steps Millionaires.
The best thing about the Baby Steps is that they are effective regardless of how much money you make—or don’t, as the case may be. Now that you know five investment options for high earners, let’s put that money to work for you!
High-income earners often face a unique challenge when it comes to saving for retirement: maximizing their contributions while staying within the income limits set by traditional IRAs. Fortunately, several options are available to help high-income individuals save for their golden years.
Understanding the Income Limits for Traditional IRAs
The IRS sets income limits for contributions to traditional IRAs. For 2024, individuals earning $73,000 or less and married couples earning $153,000 or less can contribute the full amount to a traditional IRA. However, as your income increases, your contribution limit gradually decreases. For individuals earning $146,000 or more and married couples earning $228,000 or more, contributions to traditional IRAs are not allowed.
Options for High-Income Earners
If you fall into the high-income category, don’t despair! Several options can help you save for retirement:
1. Roth IRA:
A Roth IRA allows you to contribute after-tax dollars, which means you won’t receive an immediate tax deduction. However, the significant advantage of a Roth IRA is that your qualified withdrawals in retirement are tax-free. Additionally, there are no income limits for contributing to a Roth IRA.
2. Backdoor Roth IRA:
This strategy involves converting a traditional IRA to a Roth IRA. While there are no income limits for converting, you’ll need to pay taxes on any pre-tax contributions and earnings in the traditional IRA before converting it to a Roth IRA.
3. Non-Deductible Traditional IRA:
Even if your income exceeds the limit for deductible contributions, you can still contribute to a non-deductible traditional IRA. While you won’t receive an immediate tax deduction, your contributions will grow tax-deferred, and your qualified withdrawals in retirement will be taxed.
4. Health Savings Account (HSA):
HSAs offer triple tax benefits: contributions are pre-tax, earnings grow tax-free, and qualified withdrawals for medical expenses are tax-free. Additionally, there are no income limits for contributing to an HSA.
5. After-Tax 401(k) Contributions:
Some employers allow you to make after-tax contributions to your 401(k) plan beyond the pre-tax contribution limit. These contributions grow tax-deferred, and you can later roll them over to a Roth IRA for tax-free withdrawals in retirement.
6. Brokerage Accounts:
While not tax-advantaged, brokerage accounts allow you to invest in various assets like stocks, bonds, and mutual funds. This option provides flexibility and control over your investments but does not offer tax benefits.
7. Real Estate:
Investing in real estate can be a lucrative option for high-income earners, offering potential for rental income and long-term appreciation. However, it requires significant capital and carries inherent risks.
Choosing the Right IRA for You
The best IRA for you depends on your individual circumstances and financial goals. Consider factors like your income, tax bracket, risk tolerance, and retirement goals when making your decision. Consulting with a financial advisor can help you navigate these options and choose the best strategy for your situation.
Frequently Asked Questions
Q: What is the income limit for contributing to a Roth IRA in 2024?
A: There is no income limit for contributing to a Roth IRA in 2024.
Q: What is a backdoor Roth IRA, and how does it work?
A: A backdoor Roth IRA involves converting a traditional IRA to a Roth IRA. You can contribute to a traditional IRA regardless of your income, and then convert it to a Roth IRA. However, you’ll need to pay taxes on any pre-tax contributions and earnings in the traditional IRA before converting it to a Roth IRA.
Q: Can I contribute to a non-deductible traditional IRA if my income is too high for a deductible IRA?
A: Yes, you can still contribute to a non-deductible traditional IRA even if your income exceeds the limit for deductible contributions. While you won’t receive an immediate tax deduction, your contributions will grow tax-deferred, and your qualified withdrawals in retirement will be taxed.
Q: What are the benefits of an HSA?
A: HSAs offer triple tax benefits: contributions are pre-tax, earnings grow tax-free, and qualified withdrawals for medical expenses are tax-free. Additionally, there are no income limits for contributing to an HSA.
Q: Can I make after-tax contributions to my 401(k) plan?
A: Some employers allow you to make after-tax contributions to your 401(k) plan beyond the pre-tax contribution limit. These contributions grow tax-deferred, and you can later roll them over to a Roth IRA for tax-free withdrawals in retirement.
Q: What are the risks and benefits of investing in real estate?
A: Investing in real estate can be a lucrative option for high-income earners, offering potential for rental income and long-term appreciation. However, it requires significant capital and carries inherent risks, such as market fluctuations and vacancy rates.
Q: How can I choose the right IRA for my situation?
A: The best IRA for you depends on your individual circumstances and financial goals. Consider factors like your income, tax bracket, risk tolerance, and retirement goals when making your decision. Consulting with a financial advisor can help you navigate these options and choose the best strategy for your situation.
Health Savings Account
If you use your Health Savings Account (HSA) properly, it can give you three tax breaks! It’s like a hidden gem of investing. An HSA is both an investment and savings account.
You need to have a high-deductible health plan in order to be eligible for an HSA. An HSA serves as a tax-advantaged emergency fund for medical costs in the near term. You can pay for prescription drugs, doctor visits, and a host of other medical expenses with the money you save in your health savings account (HSA).
The best thing about the Health Savings Account (HSA) is that you can make pretax contributions, take advantage of tax-free growth, and withdraw money tax-free when it’s used for medical expenses. It’s a win-win-win!.
However, you can use your HSA as a “health IRA” if you change your perspective from one of the short term to the long term. Because you can invest the money you save in your HSA in addition to saving it there. After making a minimum contribution (typically $1,000–2,000), you can begin allocating your funds to mutual funds within the HSA.
And if you invest wisely now, this account can grow to be a big ol’ pot of money that will help you cover the cost of medical expenses in your later years. The average couple retiring today will rack up $315,000 in health care expenses (and that doesn’t include long-term care costs).3 And again, as long as you’re using the money to pay for medical expenses, you get to use it (including the growth of your investments) tax-free!
You can withdraw funds from your HSA and use them for any purpose after you turn 65, just like you can with a traditional IRA or 401(k). But you’ll have to pay taxes on those withdrawals.
These are the benefits and drawbacks of purchasing an HSA.
Cons of Investing in a Brokerage Account:
- No tax benefits: You use after-tax funds to invest, and when you take money out, you must pay capital gains taxes. In addition, taxes are due on dividends that you retain rather than reinvested.
- Liability: A 401(k) and other comparable retirement account investments are shielded from litigation. That’s not the case with a taxable account. That’s why you need umbrella insurance.
Real estate investing is very popular, and you can get a good return on your investment if you do it correctly. The first step in real estate investing is homeownership, so pay off your home before making any more real estate investments.
The most labor-intensive and hands-on investment option is real estate. So, unless you have a genuine passion for real estate, avoid jumping in headfirst. Before you buy, do your homework. Talk to people who’ve done it. They’ll tell you what it’s really like.
Additionally, find out what kind of insurance you’ll need by speaking with an agent, particularly if you plan to invest in rental property. Calculate how much money you would actually make after paying for taxes, utilities, and other expenses. And never, ever borrow money to buy real estate. Purchase investment properties only when you have the cash on hand.
Buying land is a less active way to make real estate investments. If you live in an area where the housing market is flourishing, buying land outside of town could be a wise choice. Before you buy land, research the area thoroughly as with other investments because the outskirts might soon become a new subdivision. When the time comes to make a purchase, make sure you’re working with a top-tier real estate agent.