8 Retirement Savings Strategies for High-Income Earners That Work

Planning for retirement can be tricky. That is true even if you are a high-income earner.

But with the right planning and a sound money strategy, high earners can optimize savings and reduce taxable income.

Here is a look at some retirement savings strategies that may help you grow wealth ahead of your retirement years.

Maxing out contributions to tax-advantaged retirement accounts is a great way to both build wealth and reduce taxable income.

Investments in these accounts compound over time without being subject to erosion from taxes. It can be wise to contribute to a 401(k) or other similar retirement account if you are eligible to do so.

If your income level is too high, you might not be eligible to contribute to a Roth IRA. But it is possible to get around this limitation by using the “backdoor Roth” strategy.

Here is how it works: First, you make a nondeductible contribution to a traditional IRA. Then, you convert the IRA to a Roth IRA.

This strategy gives you the option of tax-free growth now and tax-free withdrawals in retirement.

A “mega backdoor Roth” strategy offers high earners the chance to supersize a retirement contribution. With this option, high earners use after-tax contributions they make to a 401(k) to fund their Roth IRA.

The dollar amounts involved are usually large, hence the name “mega” backdoor Roth. Not every plan allows this option, but many do.

This is a complicated strategy. So, you may want to check with your financial advisor to see if this is a good move for you, and to make sure you do it right.

A non-qualified deferred compensation plan — often known as a NQDC plan — lets you defer a portion of your salary or bonus to a future date, perhaps during retirement.

An advantage with this plan is that there are no IRS contribution limits. The money grows tax-deferred until you withdraw it. Then, it’s taxed like ordinary income. With any luck, you will be in a lower tax bracket during retirement.

Some companies offer NQDC plans, typically as benefits for top executives and other key employees.

Be mindful of asset location: You want to keep your investments in places that maximize tax-efficiency.

For instance, tax-inefficient assets — such as bonds — typically are better kept in tax-deferred accounts, such as a 401(k) or IRA. On the other hand, you can keep stocks and other tax-efficient assets in taxable brokerage accounts, where they are subject to lower capital gains tax rates.

These aren’t hard-and-fast rules. For example, there is nothing wrong with keeping stocks in tax-deferred accounts.

However, the takeaway is that using smart asset-location strategies can reduce your overall tax burden so you see even more growth in your retirement savings.

Many people overlook a health savings account (HSA) when creating a retirement savings strategy. But this can be a useful savings tool for everyone, including high earners.

The money that you save in an HSA today can be used to help cover the cost of health care expenses during retirement. You are eligible to contribute to an HSA if you have a high-deductible health plan.

Contributions to an HSA are tax-deductible, earnings grow tax-free, and withdrawals are tax-free when you use the money to pay for qualified medical expenses. 

Best of all, there are no income limits that prevent folks from contributing to an HSA.

A 529 college savings plan offers a great way to save for education expenses. You can use these accounts to help pay school-related costs for a child, grandchild or even yourself.

And thanks to a new rule, funds not used for education can now be rolled over into a Roth IRA to help fund your retirement, or the retirement of another beneficiary.

Here’s a final retirement strategy to consider as a high earner: Invest money in stocks, mutual funds, and exchange-traded funds via a brokerage account.

Once you have maxed out contributions to tax-advantaged accounts, it can be a good idea to use a brokerage account for this purpose. A brokerage account is a flexible option with no contribution or withdrawal restrictions.

Indeed, a brokerage account does not offer the advantages of tax deferral. 

But if you choose the right types of investments, they will be subject to capital gains rates, which are generally much lower than ordinary income tax rates.

High-income earners have some special considerations to keep in mind when saving for retirement.

Some clever retirement savings strategies — such as considering the option of a backdoor Roth IRA — can help high-income earners grow their wealth in a tax-efficient manner.

As you prepare for retirement, keep in mind that tapping the expertise of a certified public accountant or financial advisor can be a big help toward building a financially stable retirement.