Retirement Savings Strategies for High-Income Earners

Thang Truong
Thang Truong
Updated on:

There were significant changes to the tax laws in 2019, but you still may not be able to contribute enough money to an IRA to provide a comfortable retirement income if you are a high-income earner. How can those with high income save enough for retirement without paying a significant chunk of it to Uncle Sam? What are some saving strategies you can employ to minimize tax payment during your retirement years and keep more of your own money? Let’s take a look.

The 2019 SECURE Act and How It Impacts Your Retirement Savings Strategies

If you haven’t heard of the SECURE act, you should familiarize yourself with it because it affects how you plan for retirement and your tax strategies. The Secure act or Setting Every Community Up for Retirement Enhancement Act of 2019 was approved in December of 2019. Some key points which may affect you:

  • The age for required minimum distributions was increased from 70 and a half to 72.
  • There are no longer age limits for traditional IRA’s
  • Annual contribution limits to 401(K) plans have increased to $19,500, $13,500 for simple IRA’s; traditional and Roth IRA limits are still set at $6,000. 
  • If you earn more than $139,000 as a single person or more than $206,000 for a married couple filing jointly, you will not be able to contribute to a Roth IRA.

High income earners, generally defined as someone who earns at least $188,000 a year, still won’t be able to contribute enough to IRA’s to allow them to continue to live a similar lifestyle when they retire. You should plan to have at least 50-60% of your pre-retirement income, so that if you make $200,000 a year, you should plan on $100-120,000 a year. At this income level, your federal income tax would be 24%.

If you’re not careful, taxes will take a significant chunk of your money when you retire. You’re going to need tax-deferred and tax-free investments to reduce your current tax liabilities and tax payment. As high income earners, it is very likely that you will have to employ all saving and investment options available to maximize your retirement income. Let’s go over some of these options.

>>MORE: Tax-Free Savings vs. Retirement Annuity: Which is Better for You?

Retirement Plans

You won’t be able to contribute enough to completely fund your retirement, but if you have a 401(k) or 403(b) you should take advantage of this tax-deferred account. You contribute to these plans with pre-tax dollars, so you won’t pay taxes on the money until you withdraw it. While your pre-tax dollars are sitting in the account, they’ll earn dividends and interest. 

You can contribute up to $19,500 to your 401(k) and workers over 50 can contribute an additional $6,000. That reduces your taxable income by as much as $25,500. If you earned $200,000 in 2020, your taxable income is reduced to $174,500.

If you own your own business, you can invest in a SEP IRA (simplified employee pension individual retirement account). This allows self-employed business owners to contribute up to $57,000 in this tax-deferred account. However, be careful: if you have employees, you must contribute on their behalf as well. It’s meant to serve as a pension fund for the self-employed. 

Health Savings Account

You can contribute up to $3,550 for an individual and $7,100 for a family in 2020. You contribute to the account with pre-tax dollars, and if you use the money for qualified medical expenses, withdrawals aren’t taxed. 

529 Plans

If any of your children are considering college, contributions to a 529 plan may be helpful in reducing taxable income. You’ll pay taxes on the contributions, but the money grows tax-free. If you use it to pay education expenses, withdrawals will be tax-free. There are no contribution limits, although contributions over $15,000 per beneficiary count against your lifetime estate tax exemption. 

If your child decides not to pursue higher education, you can change the beneficiary to another child, a niece, nephew, or grandchild. If your child gets a full-ride scholarship, you can withdraw the money without penalty. Otherwise, you’ll pay state and federal income taxes on the withdrawals, plus a penalty. However, you could leave the money in the account. The beneficiary could use it later in life, or you could use it for education for yourself.

Indexed Universal Life Insurance (or IUL) For Saving for Tax-Free Retirement Income

Permanent life insurance with a cash value account attached is perfect for those looking for somewhere to park larger amounts of money. As a high income earner, if you’re in good health you’ll probably qualify for a life insurance policy with a death benefit between $1.5 and $2 million. You’ll pay premiums with after-tax money, but the cash value account grows tax-free. When you retire, you can withdraw money from the cash value account, completely tax-free.

The best policy for this purpose is Indexed Universal Life Insurance (or IUL), whose cash value account earns a high interest rate tied to the performance of an index, usually S&P 500. The cash value account of the policy is also protected with a floor rate, usually 0-2%. Essentially, the policy is designed to benefit from the upsides when the stock market performs well, but avoid the downsides when it declines. The interest rates vary by the IUL products and the insurance companies, but on average, they are usually 5-7%. Learn more about the nuts and bolts of why IUL policy is a great option for retirement savings.

>>MORE: Should I Invest in S&P 500 Index Through an Indexed Universal Life Insurance (IUL) Policy?

>>MORE: How Much Income Tax Will You Have to Pay in Retirement? A Case Study

[elementor-template id=”2781″]

Buy Bonds

Interest earned on tax-exempt bonds is not subject to federal income tax. Bonds typically earn less than other types of investments, but if you’re looking to save money on taxes, they could be a worthwhile investment. Even the interest payments may be tax-exempt.

Backdoor Roth IRA for High-Income Earners

Since you’re a high income earner, the IRS does not allow you to contribute to a Roth IRA. The threshold is single filers earning more than $139,000 or a married couple earning more than $206,000. However, you can convert a traditional IRA to a Roth IRA. Since a Roth IRA uses after-tax dollars, the money you (eventually) withdraw is tax-free. However, you’ll pay taxes on the amount you converted, so be prepared for that tax bill. Also, the most you can contribute to any IRA is $6,000 for 2020. 

Backdoor Roth’s can get extremely complicated. If you already have a substantial amount of money in traditional IRA, the upfront taxes might not be worth it. However, a Roth will allow you to enjoy tax-free withdrawals when you retire. A financial advisor would be a good idea in this situation. 

As of 2018, you can no longer convert your Roth IRA’s back to a traditional IRA—once it’s done, it’s done. Make sure you’re comfortable with that. 

[elementor-template id=”2957″]

Last Thoughts

High income earners have a special set of circumstances to contend with when saving for retirement. You want to keep as much money for yourself as you can while still complying with tax laws. Luckily, there are a number of tax-friendly strategies you can employ. Saving for retirements and minimizing tax payment can be complex, so you might want to meet with a good financial advisor to figure out how to make the most of your high income and pay the least amount of taxes possible.

Thang Truong

Thang Truong covers small business insurance and small business success at BravoPolicy. He is a licensed P&C insurance agent. Previously, he held product leadership positions at, Capital One, NerdWallet, and Mulberry Technology. He holds a MBA degree from UC Berkeley - Haas School of Business.

More Stories

6 Best Indexed Universal Life Insurance (IUL) for 2023

Are you looking for a way to set aside some extra money for your senior years, and maybe a little extra for loved ones to inherit? Most people opt for indexed universal life insurance because it offers the greatest cash value growth tied to the performance of S&P 500 index with the least risk thanks […]

Best Self-Directed Roth IRA Companies for 2023

A self-directed Roth IRA is much like a regular Roth IRA, but offers more flexibility as far as what you can invest in. Whereas a regular Roth will only let you invest in stocks, bonds, mutual funds, ETFs, and real-estate investment trusts, a self-directed Roth lets you invest in a greater variety of investment options.  […]

The 5 Best Hybrid Long-Term Care Insurance Companies for 2023

If you’ve decided to plan for every eventuality, you’d be smart to include a plan to cover long-term care. Someone turning 65 this year has an almost 70% chance of needing some type of long-term care, and about 13% of those will need it for five years or more. Long-term care is expensive and can […]

The 3 Best Traditional Long-Term Care Insurance Companies for 2023

Long term care is something that no one likes to think about, but unfortunately, many people will eventually need. Health care costs are skyrocketing, and a lengthy stay at a long-term care facility can easily bankrupt most people’s nest eggs. Long-term care insurance is one way to protect both yourself and your retirement savings. Out […]

The Best Long-Term Care Insurance Companies in California for 2023

California residents who are keen to protect themselves and their families against the worst events in life may be considering long-term care insurance. However, you might not know much about LTC insurance or how it is handled in California. Let’s take a look: What is Long-Term Care Insurance? Long-term care insurance helps pay for long-term […]

The Best Long-Term Care Insurance Companies in Arizona for 2023

Arizona is a great place to retire. It’s warm, there’s no snow to shovel, and Arizona improves the quality of life for anyone with allergies or asthma. When you pack your bags and retire to Arizona, you’re probably not thinking about long-term care. But the sad reality is that 47% of men and 58% of […]

The Best Long-Term Care Insurance Companies in Florida for 2023

There’s a lot of good reasons to retire in Florida. The weather is warm, the beaches are beautiful, and there are lots of other retirees to socialize with. Also, Florida has no state income taxes, no inheritance taxes, and no estate taxes. When you pack up your things and move to Florida, you’re probably not […]

Private Placement Life Insurance: Everything You Need to Know

If you haven’t heard of private placement life insurance, you probably don’t qualify to buy it. Private placement life insurance is typically for investors with millions in liquid cash that they need to invest for tax reasons.  What is Private Placement Life Insurance? Who Qualifies for Private Placement Life Insurance? Benefits of Private Placement Life […]

Nationwide IUL – A Strong Product With Great Features and Excellent Ratings

The Nationwide IUL product can help you either supplement your retirement income or ensure your beneficiaries future by leaving them a nice tax-free death benefit. Obviously, you have many options when it comes to IUL policies, so you want to know how does Nationwide’s policy stack up against the competition? Let’s take a look. Pros […]

Transamerica IUL – A Solid Product but High Consumer Complaint Score & Law Suits

Consumers looking to supplement their retirement income often settle on an indexed life insurance policy. These policies build cash value based on market performance and allow your heirs to enjoy a tax-free death benefit. Let’s take a look at Transamerica’s indexed universal life insurance policy and see what makes it stand apart from other such […]