How High-Income Earners Can Boost Their Retirement Savings

Your employer retirement plan is typically the easiest way to save for retirement. However, over time, as wages go up and you increase the amount you’re putting into the plan, you may find that you are maximizing those contributions.

Maxing out your 401(k) plan contributions is a great goal to achieve, but it presents a potential issue: Once you’re putting the maximum into your employer retirement plan, where should you place additional retirement savings? There are a few common possibilities for high-income earners, each with its pros and cons.

Roth IRA

Pros: Tax-free growth and withdrawals. You contribute after-tax dollars and enjoy tax-deferred growth, and when you need the funds in retirement, your qualified withdrawals from a Roth IRA come out tax-free.

Also, if you run into a financial need, you can withdraw your contributions at any age without penalty. Another benefit of Roth IRAs is they are not subject to required minimum distributions (RMDs), which come into play with traditional IRAs (which we’ll talk about in the next section).

Cons: Limits to who can contribute and how much. The maximum amount you can contribute to a Roth IRA for 2021 is $6,000 if you’re younger than 50. If you’re 50 or older, you can add an extra $1,000 in “catch-up” contributions for a total of $7,000.

In addition, income limitations determine whether you qualify to make a Roth IRA contribution. In 2021, those limits start at $198,000 of modified adjusted gross income (MAGI) for joint filers and $125,000 for single filers.

Once you reach these income levels, the amount that you can contribute to a Roth IRA begins to get reduced until you hit an income level ($208,000 for joint and $140,000 for single) where you are ineligible to make contributions.

Traditional IRA

Pros: Potentially tax-deductible contributions and tax-deferred growth. If you meet income limitations, you can contribute to a traditional IRA and get a tax deduction for doing so. The funds then grow tax-deferred as long as they remain in the IRA.

Cons: Contribution limitations. The amount that can be contributed is the same as with the Roth IRA ($6,000 under 50 with a $1,000 catch-up contribution).

Assuming a retirement plan at work covers you, you have some income limitations to be aware of if you’re hoping to receive a tax deduction for your contribution. Income needs to be $66,000 or less for single filers and $105,000 or less for joint filers to receive a full deduction. Otherwise, you will begin to have your deduction amount reduced until it reaches zero.

In addition, withdrawals are taxable as ordinary income, and if you withdraw before reaching age 59.5, you may have to pay a penalty. Traditional IRAs are subject to RMDs starting at age 72, meaning you must withdraw from the account whether you want to or not.

Health Savings Account

Pros: Tax-deductible contributions and tax-free withdrawals when used for qualified health care expenses. In many ways, health savings accounts (HSAs) are like retirement accounts. This is because you can use the money for any expenses once you turn age 65 and not incur a penalty.

Additionally, HSA contributions can be made through payroll deduction, which means you won’t pay FICA taxes on those dollars that you contribute.

Cons: Health plan requirements and contribution limits. You must be enrolled in a qualified high-deductible health plan to contribute to an HSA. Plus, contribution amounts are limited to $3,600 for self-only or $7,200 for family coverage in 2021.

Taxable Account

Pros: No withdrawal or contribution limits. If flexibility is your priority, then saving funds into a taxable account is probably your best bet. A taxable account is often referred to as a brokerage account or nonqualified account. This is not an actual retirement savings account, so you won’t have contribution or withdrawal limitations to worry about.

Cons: No tax deductions, no tax deferral, and no tax-free withdrawals. Since it’s not a retirement account, there are no real tax benefits to putting savings into a taxable account. You will pay taxes on interest, dividends, and capital gains each year that they are generated—it’s a pay-as-you-go system.

Which Account Is Right for You?

Each type of account has advantages and disadvantages to consider, and the best option can vary depending on your particular situation and goals.

It can help to work with a full-time fiduciary financial advisor who will help you make informed decisions about saving for retirement in light of your entire financial picture. Our fee-only, fiduciary wealth management firm in Topeka and Lawrence, Kansas, provides comprehensive financial planning for high-income earners at all stages of their life.

The key is not to stop your retirement savings once you’ve maximized your employer retirement plan since it may not be enough to fund your retirement lifestyle the way you would like. Keep increasing your savings—you’ll thank yourself later!


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Elizabeth Young, CFP®

As Partner and Senior Wealth Advisor, Elizabeth Young finds it gratifying whenever one of her clients reaches a long-held goal with her help and guidance. Those “aha” moments drive the work she does for our firm, including serving as the primary financial planning contact for clients and overseeing general client service.