Retirement Plan Strategies for High-Income Earners | Adviser

Retirement Plan Strategies for High-Income Earners

High Earners: 5 Smart Comprehensive Financial Planning Moves for 2023
If you are a doctor, lawyer, thriving business owner, successful executive or another high-income earner, this thought has probably crossed your mind: How will I maintain my lifestyle once I retire—especially if I want to retire early? You’re not alone.

In this article, we’ll look at some retirement plan strategies for high earners that you can start using today to set yourself up for the comfortable retirement you deserve.

Tip: For straightforward financial advice, click here to explore and sign up for more of our expertise on a variety of topics in various formats.

Getting the Most From Your 401(k)

Maxing out your 401(k) contribution every year is a no-brainer for high-income earners. In 2023, the maximum contribution to a 401(k) is $22,500 (or $30,000 if you’re age 50 or older and making a catch-up contribution, mentioned below). This contribution is made tax-free, effectively lowering your tax liability for the year.

If you’re not self-employed, you probably receive an employer match in addition to your own. These amounts alone aren’t generally enough to retire on, but if you invest that money and keep it growing tax-free, it can accumulate over time.

By digging into the mechanics of a 401(k), you can find some retirement savings strategies for high earners that can amplify this valuable investment vehicle.

Here are a couple considerations:

Expand your investment options. 401(k) investment options are usually limited to a small group of mutual funds or exchange-traded funds (ETFs). But some plans allow you to add a brokerage link inside of your 401(k), opening up a far broader investment universe with potentially greater opportunities for growth.

Know your plan’s vesting requirements. Any contributions you make to your 401(k) vest immediately. That money is yours even if you leave the company the next day. Employer contributions are often subject to a “cliff” or “graded” vesting schedule. Cliff vesting occurs all at once (e.g., after five years of employment); graded vesting happens gradually (e.g., 20% each year for the first five years at the company).

Consider a Roth 401(k). More and more 401(k) plans today offer a Roth 401(k) option, which has all the advantages of a Roth IRA with one big difference—there are no income phaseouts. Splitting 401(k) contributions between a Roth 401(k) and a traditional 401(k) enables high earners to realize tax benefits now (by deducting traditional 401(k) contributions) and later (with tax-free distributions from your Roth 401(k) when you retire).

Tip: Equity compensation is becoming a bigger part of many employees’ paychecks. Understand the ins and outs of this wealth-building tool. Listen to our podcast, Making the Most of Equity Compensation.

Complications in 401(k) Catch-Up Contributions for High Earners

Savings options for high earners expand as retirement gets closer. Under current law, people age 50 and up are allowed to make an additional $7,500 contribution to their employer-sponsored 401(k), which, like your regular contribution, is also made tax-free.

But beginning in 2024, 401(k) catch-up contributions get more complicated for certain high earners. Starting then, if your W-2 income exceeds $145,000, any catch-up contribution is required to be treated as a Roth 401(k) contribution. And if your company doesn’t offer a Roth 401(k) option? Catch-up contributions are not allowed if you exceed that income threshold.

The Backdoor Roth IRA Retirement Plan for High Earners

High-income earners typically cannot contribute to a Roth IRA due to income restrictions. In 2023, if you earn $153,000 or more as an individual or $228,000 or more as a couple, you are not allowed to contribute to a Roth IRA.

But there’s a completely legal hack to this rule: A backdoor Roth IRA conversion, which transfers funds from a traditional 401(k) or IRA into a Roth IRA.
Why is this a good retirement plan option for high earners? You can potentially compound your benefits and then withdraw funds tax-free in retirement. This is especially great if your retirement is many years down the road or if you expect to be in a higher tax bracket in the future.

An even more powerful means of building up your Roth IRA assets is the lesser-known “mega backdoor” Roth.

Here’s how it works:

A mega backdoor Roth conversion also involves rolling over post-tax funds from a traditional 401(k) into a Roth IRA. Normally, 401(k) contributions are pretax; but with the mega backdoor Roth option, once you surpass the annual individual contribution limit, some employers have plans that allow additional after-tax contributions.

As noted earlier, in 2023, individuals can contribute up to $22,500 to their 401(k). But if you convert to a mega backdoor Roth and your employer allows after-tax contributions, you can contribute up to $66,000 total—with the amount over $22,500 rolling into a Roth IRA.

Not all 401(k) plans allow mega backdoor Roth conversions—we can help you determine if it’s permissible under your plan. And the tax implications can be challenging to figure out. We’d be happy to assist you with evaluating this potentially great retirement option.

Why High Earners Should Invest in a Health Savings Account

Triple. Tax. Benefits. Do we have your attention? Health savings accounts (HSAs) are a fantastic retirement plan for high earners, offering a way to shelter a portion of your income to spend later in life on what is likely to be your biggest foreseeable expenditure: Your health.

HSAs are one of the most tax-efficient savings vehicles available, offering threefold tax advantages:

  • Like a 401(k), you contribute dollars pretax
  • You pay no taxes on the earnings
  • If the money is used for medical expenses, you withdraw it tax-free

You may already be using a flexible spending account for everyday medical expenses. But unlike that account, which must be spent by year-end, HSAs are with you forever—use it or lose it does not apply.

And though you may hear “pretax dollars” and start bracing yourself for withdrawals taxed as income (like with IRAs or 401(k)s), that’s not the case here. Money you take out of an HSA for qualified medical expenses is income-tax-free. (Nonqualified expenses will face a 20% penalty and income taxes, so be sure to monitor these closely.)

Unlike a lot of retirement account strategies for high earners, HSA rules are simple: Contributions are tax-deductible through Medicare age (65). And anyone can contribute to your HSA—yourself, employers, family members—as long as you stay within annual contribution limits ($3,850 for individuals, $7,750 for families in tax year 2023).

As the HSA’s value grows, there’s no requirement that you tap into it—continue to pay medical expenses with whatever funds you prefer. Later in life, once your account has grown and compounded, you can reimburse yourself from the HSA, tax-free, for all those expenses you paid in previous years. Note that this means you need to keep scrupulous records of that spending.

HSAs pack a potent, tax-free investing punch if you plan ahead and bide your time. Contact us if you’re interested in learning more.

Professional Help Means Peace of Mind

If your goal is to make the most of your retirement savings, Adviser can help.

For 30 years, we’ve partnered with high earners like you to establish wealth management solutions that provide peace of mind and prepare you to maintain your lifestyle after you’re done working. We’d love to hear more about your aspirations and goals.

If you are a client, please reach out and we’d be more than happy to help.

If you are not a client, click here to book a meeting with one of our expert financial advisors now!

Tax and legal information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

Our statements and opinions are subject to change without notice. All investments carry risk of loss and there is no guarantee that investment objectives will be achieved.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.


Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

© 2023 Adviser Investments, LLC. All Rights Reserved.