8 Retirement Savings Strategies for High-Income Earners

High-income earners can optimize their retirement savings by using strategies like maximizing contributions to retirement accounts, making backdoor Roth conversions and managing investments strategically. These approaches can provide tax advantages and help grow wealth to meet long-term financial goals.

If you want to build your nest egg, a financial advisor could help you identify investment opportunities and determine the risks.

Adapting your retirement savings strategy to fit a high-income level can help secure a comfortable and well-funded retirement. Here are eight general strategies for high-income earners to consider.

Maxing out tax-advantaged retirement accounts is a strategic move for high-income earners looking to reduce taxable income while growing their wealth for the future. 2024 contribution limits are:

• Employer-sponsored accounts: In 2024, the contribution limit for 401(k) and similar workplace retirement accounts is $23,000, with an additional $7,500 catch-up contribution for those 50 and older. 
• IRAs: The annual contribution limit for IRAs is $7,000 in 2024, plus a $1,000 catch-up for those 50 and above. 

By fully funding these accounts, high-income earners can benefit from tax-deferred growth. This allows investments to compound over time without tax erosion, giving you a larger nest egg in retirement.

In 2024, certain high-income earners are ineligible to contribute directly to a Roth IRA. This includes modified adjusted gross income (MAGI) limits of above $161,000 for single filers and $240,000 for married couples filing jointly.

However, they can still access the benefits of a Roth IRA through a backdoor Roth IRA. This retirement savings strategy for high income earners involves contributing to a traditional IRA and then converting those funds to a Roth IRA. High-income earners use this approach because it allows for tax-free growth and withdrawals in retirement, which is especially beneficial given the tax advantages. Additionally, Roth IRAs do not have required minimum distributions (RMDs), offering more flexibility in retirement planning.

A non-qualified deferred compensation (NQDC) plan retirement savings strategy for high income earners that allows you to defer a portion of their salary or bonus to a future date, typically in retirement. Unlike qualified plans, such as 401(k)s, NQDC plans do not have contribution limits set by the IRS, offering the flexibility to defer larger amounts of income. 

The deferred money grows tax-deferred until it is withdrawn, at which point it is taxed as ordinary income. This can be advantageous for high earners who expect to be in a lower tax bracket during retirement. NQDC plans are often offered by employers as a benefit to key executives or high-level employees, allowing them to manage their income and taxes more effectively over the long term.

A mega backdoor Roth IRA is a strategy that allows high-income earners to contribute significantly more to a Roth IRA through after-tax contributions to a 401(k) plan. 

In 2024, individuals can contribute up to $69,000 (or $76,500 if 50 or older) across all 401(k) contributions, including employee contributions, employer match and after-tax contributions. After making the maximum after-tax contribution to the 401(k), the individual can convert those funds to a Roth IRA, allowing for tax-free growth and withdrawals in retirement. This strategy is beneficial for those who want to maximize their retirement savings beyond the standard Roth IRA contribution limits.

A health savings account (HSA) is a tax-advantaged savings account available to individuals enrolled in a high-deductible health plan (HDHP). For high-income earners, an HSA can serve as a supplemental retirement savings tool, as funds can be used tax-free for medical expenses in retirement or withdrawn for any purpose after age 65 (though non-medical withdrawals are subject to income tax). This flexibility makes HSAs a valuable addition to a comprehensive retirement strategy.

In 2024, the contribution limits for HSAs are $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution for those 55 and older. HSAs offer a triple advantage: contributions are tax-deductible, earnings grow tax-free and withdrawals for qualified medical expenses are also tax-free. 

Asset location strategically places investments in different types of accounts to maximize tax efficiency. For high-income earners, this means placing tax-inefficient assets, like bonds, in tax-deferred accounts such as a 401(k) or IRA, where they can grow without being taxed annually. Conversely, tax-efficient assets, like stocks, can be held in taxable brokerage accounts, taking advantage of lower capital gains tax rates. By implementing asset location, high earners can potentially reduce their tax burden over time, allowing for more efficient growth of retirement savings.

Another retirement savings strategy for high income earners is a 529 Plan. Contributing to one can help a beneficiary begin saving for retirement, especially with the benefits introduced by the SECURE 2.0 Act. If funds in a 529 plan are not used for education, they can be rolled over into a Roth IRA for the beneficiary, up to the lifetime limit of $35,000. This allows the beneficiary to begin building tax-free retirement savings using leftover education funds for an early start to retirement planning. With this rollover feature, 529 plans are a versatile tool for both education and retirement.

Investing excess savings in a brokerage account is a flexible option for high-income earners who have maxed out contributions to tax-advantaged accounts. Unlike retirement accounts, there are no contribution limits or withdrawal restrictions on brokerage accounts, allowing for greater control over investment choices and liquidity. While investments in a brokerage account are subject to capital gains taxes, this account can still provide a valuable way to grow wealth and diversify retirement savings, especially when other options have been fully used.

High-income earners have many opportunities to enhance their retirement savings through strategic planning and the use of different financial tools. Maximizing contributions to retirement accounts, leveraging Roth conversions and taking advantage of specialized plans, could help you optimize your tax efficiency and grow your wealth over time. Additionally, considering asset location and using flexible savings accounts can help you make the most of your resources.

• A financial advisor can help you create and manage a retirement portfolio based on your goals and needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now. 
• If you want to know how much your retirement savings could grow over time, SmartAsset’s free retirement calculator could help you get an estimate. 

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