401(k) and other retirement plan limits can be frustrating for people earning more than $250,000 per year who want to utilize tax-advantaged investments for their long-term financial goals.
As an employee at a company, you don’t have as much control over retirement vehicles as a business owner does. Your plan may limit you to $23,000 per year if you’re under 50 in 2024. Here is where you can save once you’ve maxed out your employer-sponsored retirement plan, along with some of the tax implications of each option.
Other Retirement Plan Options
As a high earner, you will be unlikely to qualify to fully contribute directly to a pretax or Roth Individual Retirement Account (IRA). However, there are still some ways to take advantage of IRAs as a high earner.
You can contribute directly to a non-deductible IRA as a high income-earner. While you wouldn’t get any deductions for contributions, the funds in the IRA would grow tax-deferred, meaning that you pay no taxes on income or gains until you take money out of the account. When you end up distributing money, the growth would be taxable. Your contribution limit if you’re under 50 in 2024 is $7,000.
Along the same lines, even if individuals are ineligible to make Roth contributions directly, they can make non-deductible IRA contributions and immediately convert those to Roth. This is known as a backdoor Roth conversion. That same $7,000 limit is applicable here.
Like in your employer-sponsored plan, you could end up facing 10% in IRS penalties plus applicable federal and state income taxes on growth if you withdraw these funds prior to age 59 ½.
You may also be eligible to save in a Simplified Employee Pension (SEP) if you earn income from a side hustle outside of your W2 payments. You could save up to 25% of your adjusted gross income from that income on top of your 401(k) maximum through your employer.
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Health Savings Accounts
While health savings accounts (HSAs) aren’t technically designed for retirement planning, they can be useful as a supplement to your other retirement savings. Oftentimes, especially for people whose employers supplement the cost of their health insurance during their working years, healthcare costs increase significantly in retirement.
HSAs allow people to save pretax money into their plans and spend money tax-free on qualified healthcare expenses. Depending on the HSA provider, you may also be able to invest and grow your funds on a tax-deferred basis. In 2024, people with single coverage in a high-deductible health plan can contribute up to $4,150 to their HSA (the number doubles for family coverage).
To deter investors from abusing this privilege, there are hefty penalties for withdrawing HSA money for purposes other than qualified medical expenses. You would pay a 20% penalty on top of your state and federal income taxes for a nonqualified withdrawal.
Insurance Products
With the options we’ve discussed so far, we’re already above $34,000 in tax-advantaged savings toward retirement per year. If you want even more ability to save toward a long-term goal, you may turn to insurance products.
Annuities
Nonqualified annuity contributions receive the same tax treatment as the non-deductible IRAs. You contribute money after taxes, the income, growth, and rebalancing are tax-deferred, and then you pay income taxes on the growth upon distribution. There are also penalties for withdrawals before age 59 ½. Unlike non-deductible IRAs, there is no annual contribution limit.
When considering annuity options, investors should be aware that there are many types of annuities in the marketplace. I recommend working with a qualified financial professional held to a fiduciary standard to sufficiently assess the best option for your personal financial goals and risk tolerance.
Permanent Life Insurance
When most people hear about life insurance, they immediately think of a death benefit. However, permanent life insurance has a cash value component as well as a death benefit. The cash value of permanent life insurance grows tax-deferred and can be distributed tax-free at any time as long as the insurance policy remains in place. If a policy lapses or is surrendered, the investor will owe income taxes on any applicable growth of the cash value.
When structured and funded optimally, this can be used to supplement retirement income by adding a tax-free source. However, it is again important to work closely with a fiduciary advisor. When these policies are structured or funded poorly, they can be a costly and burdensome investment.
Tax-Efficient Investments In A Standard Investment Account
Once you’ve exhausted all of your tax-advantaged options, you may want to save additional money in a standard investment account without tax wrappers. When you do this, some investments are more tax-efficient than others. As a high earner, any additional income, dividends, taxable interest or recognized capital gains generated from your portfolio can add taxes that weigh down your returns.
For your fixed income portion of your portfolio, consider municipal bond funds, which can generate tax-free interest payments on a federal, state, and local level depending on the bond issuer. For your equity portion, consider exchange-traded funds (ETFs) over mutual funds. Because of how they trade, ETFs generally generate less annual taxes than mutual funds.
Conclusion
Once you’ve maximized your retirement plan contributions, there are many ways to save more money toward retirement if you feel behind, have lofty retirement goals, or wish to gain financial independence early in life. For other retirement plan options to supplement their employer plan, individuals can look to a SEP, non-deductible IRA, or a possible Roth IRA conversion. HSAs can offer investors a tax-efficient method of paying for retirement healthcare expenses. If you have a need for coverage, insurance products, when properly vetted and structured, can also offer tax advantages with unlimited contribution amounts. When other tax-advantaged options are exhausted, high earners can also invest in standard investment accounts as tax-efficiently as possible.
This informational and educational article does not offer or constitute, and should not be relied upon as, tax or financial advice. Your unique needs, goals and circ*mstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article.Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve or make any representations as to the accuracy, completeness or appropriateness of any part of any content linked to from this article.
Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified.Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC).AGE-6878404.1 (08/24)(exp. 08/26)
