High-Income Earners & Retirement Planning: How to Save More
As the coronavirus crisis has shown, the unexpected can happen at any time, threatening both health and finances. While that doesn’t mean you should panic, high-income earners may want to reassess their retirement planning so that they have more of a cushion and flexibility regardless of what happens later in life.
In particular, consider saving more for retirement now, because even if markets are healthy when you retire, other factors could affect your savings, such as unexpected medical costs or home repairs. And you also will likely want to maintain a lifestyle similar to the one you enjoyed in your career years, which will require planning now. Even though you may have the additional income to save, you face contribution limits for retirement accounts such as 401(k)s and Roth IRAs.
That said, high-income earners can take several retirement planning steps, such as:
Maxing Out Retirement Plan Contributions
As a high-income earner, you may have the ability to save the maximum allowed within workplace retirement plans such as 401(k)s. The limit for 2020 is $19,500; if you are age 50 or older, you can put aside $6,500 more in catch-up contributions.
Maxing out a workplace retirement plan can be a bit of an art because once you earn above the limit ($285,000 in 2020), you cannot contribute or receive employer matches. This means that if you expect to make more than this income cap, you may want to front-load your contributions.
For example, if you earn $30,000 per month, you will cross $285,000 in earnings in October—so consider maxing out your contributions before then.
Also keep in mind that total employer and employee contributions can equal $57,000 for 2020, plus $6,500 in catch-up contributions for those age 50 or older.
Converting a Traditional IRA to a Roth IRA
In addition to maxing out workplace retirement plans, you may also contribute to an IRA. However, income limits could prevent you from making tax-free contributions to a traditional IRA.
Married couples cannot deduct traditional IRA contributions if they are filing jointly, have $124,000 or more in income, and have access to a workplace retirement plan. Also, married couples filing jointly and earning $206,000 or more cannot contribute directly to a Roth IRA plan.
Yet that does not mean you should forgo IRAs. Even if you cannot make tax-free contributions, consider saving the $6,000 annual max in a traditional IRA, plus $1,000 for those age 50 or older. Then convert your traditional IRA to a Roth IRA.
Doing so means paying taxes upfront on any investment gains, but you will also have the advantage of allowing your account to grow tax-free and be withdrawn from tax-free in retirement.
Optimizing Brokerage Account Savings
As a high-income earner, you might also create a retirement bucket within a traditional brokerage account. While these accounts are taxable and contributions must be made with post-tax money, you face no limits on how much you can contribute.
That means you can work with your financial planner to save as much as you need as part of your overall retirement plan, and you can optimize these savings in a way that helps net you more income.
For example, within brokerage accounts, you may be able to harvest tax losses, meaning you use investment losses to offset taxable gains. Doing so can reduce your tax bill during your working years, allowing you to save more for retirement. Then, in retirement, you can carefully wind down your brokerage account to minimize taxes, such as by withdrawing an amount that keeps you below the top tax brackets.
Working with a Financial Advisor
Retirement planning for high-income earners may seem restrictive due to income limits on contributions. Still, with a little knowledge and motivation, you can help make sure you are contributing enough for the retirement lifestyle you desire.
Our financial planning firm in Richmond, VA, is here to help you learn more about retirement planning strategies and can help you customize your approach based on your income, retirement goals, and other important factors. To discuss your personal situation with a financial advisor in more detail, schedule a complimentary 30-minute phone call.
The information contained in this presentation does not purport to be a complete description and is intended for informational purposes only. Any opinions are those of the content creator and not necessarily those of the named advisor(s) or JWCA. This information is not intended as a solicitation or an offer to buy or sell any security or investment product. Information is solely intended for recipients in jurisdictions where the named advisor(s) are licensed to engage the investing public. Investments and strategies mentioned may not be suitable for all investors. The S&P 500 and other such indices are unmanaged, do not incur fees or expense, cannot be invested into directly and individual investor’s results will vary. Past performance is no guarantee of future results. As with all investments, various risks may exist and JWCA recommends you consult with your financial advisor prior to making any investment decisions. Advisory Services offered through J. W. Cole Advisors, Inc (JWCA). Financial Dynamics & Assoc. Inc and JWCA are unaffiliated entities.
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