A Quick Guide To Overcoming Retirement Saving Roadblocks For High-Income Earners

 Paul Tarins, RICP®,WMCP®,CSRIC™

Its common knowledge that preparing ahead of time and saving in the early stages of your career are vital to achieving your ultimate retirement goals. While earning more money can help people get ahead financially, a hefty income does not guarantee a successful retirement. If you are a person that makes a six figure or more salary per annum, you might have faced several obstacles on the road to saving for retirement and generating a steady income once you stop working. 

High-income earners often face challenging financial roadblocks while preparing for retirement due to the fact that their income may limit their ability to utilize various tax-advantaged retirement saving strategies that are available to their low-income counterparts. High-income earners that rely solely on social security and qualified plans are more likely to face savings shortfall during their retirement years.

As someone making a six figure salary or more, you must plan ahead if you want to maintain the same lifestyle throughout your retirement.

Why High Earners at a Distinct Disadvantage?

The IRS offers various tax-advantaged savings options for retirement to the people in the United States. However, the majority of the options offered by the IRS have an income cap which means only people with certain income levels can utilize these options. This makes it quite difficult for high-income earners to benefit from these effective tax-saving plans and save more for their retirement. 

Another common roadblock faced by both high-income and low-income earners is creating and maintain a plan that will help them continue with a similar lifestyle once they retire while ensuring their financial independence. The income cap on savings options given by the IRS can limit the ability of high-income earners to save for their retirement, making it more challenging for them to reach their retirement savings goals compared to low-income earners. 

Effective Strategies For Retirement Savings

Identifying the barriers you are facing on the road to reaching your retirement savings goals is the first step to overcoming these challenges. Once you understand these hurdles you can start looking for strategies that offer the best results for both you as well as your family. Here are some key retirement saving strategies that are both effective and practical and will help you generate income during your retirement period while allowing you to reach your savings goals by the time you retire:

OPTION #1: Contribute to a 401(K) 

If you haven’t started doing it already then you should be aware that contributing to a 401(k) plan that is sponsored by your employer is a great place to start to reach your retirement saving goals. You can defer as much as $19,500 of your pre-tax earnings or $26,500 is you are 50 years or older toward the employer sponsored 401(k) plan.1 A lot of employers offer matching contribution to your plan up to a specified percentage of the 401(k) contributions you are making. As of 2021, the maximum contribution limit for 401(k) plans is $58,000 with an additional amount of $6,500 for people aged 50 years or older, or 100% of the employee’s current compensation, whichever amount if lower.1

Currently the limit for deferring your compensation is $280,000. However, if you earn more money than that it does not mean you aren’t eligible for contributing to the 401(k) plan. People with higher income have the option of deferring their compensation to the 401(k) all through the year up until the year-to-date earning reaches $280,000. Once the specified maximum amount is reached, you can’t defer your earning toward the 401(k) anymore.1 

As one of the high-income earners, you can benefit from the maximum contribution threshold for your tax-deferred retirement funds offered as per your income which makes the employee-sponsored 401(k) an important foundation for your retirement savings strategy.

OPTION #2: TRADITIONAL IRA 

Roth IRAs are quite appealing to people who are saving for retirement as they allow retired persons to withdraw tax-free dollars during retirement. The bad news is that this option might not be available to some high-income earners. If, as a single filer, your adjusted and modified gross income exceeds $140,000 or as a joint filer it exceeds $208,000, then you will probably not be qualified to contribute your after-tax income to a Roth IRA account. On the flip side, you can contribute a reduced amount2 to your Roth IRA account if as a single filer you earn an income of $125,000 to $140,000 or $198,000 to $208,000 as a joint tax filer.

On the other hand, a traditional individual retirement account is a better option for high-income earners as it doesn’t have an income cap. The only requirement for this option is for the person to have any income no matter what the amount. There is still a small caveat when it comes to traditional Ira which is that there may be a limit to the amount of IRA contribution that can be deducted on your tax returns.

The amount that can be deducted from your tax returns usually depends on two things3:  

• Your gross income after it has been adjusted and modified
• Whether you regularly contribute to an employer-sponsored retirement plan or not.

OPTION #3: BACKDOOR ROTH INDIVIDUAL RETIREMENT ACCOUNT

Using the strategy mentioned above, those who aren’t qualified to utilize the Roth IRA account but want to benefit from tax-free withdrawals once they retire can take advantage of the backdoor Roth Individual Retirement Account. As the term suggests, the backdoor Roth IRA provides an indirect entrance to high earners offering them a way to place their after-tax income into the Roth IRA.

The steps involved in this process are as follows:

1. The first step is to open your own traditional IRA and start contributing toward it.
2. The next step is to get your account administrator to create paperwork and provide instructions on converting the traditional IRA into a Roth Individual Retirement Account.
3. The final step is to pay any taxes applicable on the money in your IRA as well as any gains incurred on it.

If this option seems lucrative to your retirement savings strategy, then you should consult with a CPA or financial advisor for more instruction and guidance. 

If you have been earning an income of six figures or more, you can benefit by working with financial advisors or retirement specialists such as those at Sovereign Retirement Solutions in Florida, who can help you indefinity and understand various savings options. They can also help you develop a more aggressive savings strategy depending on your retirement goals, current financial status, and your age. Whichever strategy you decide to go with, it is imperative to keep up with any eligibility requirement changes and be mindful of any contribution limits. This will help you avoid any unpleasant surprises in terms of tax bills and contribution caps now or in the future. 

For more information about retirement planning and investment management, get in touch with experienced financial advisors at Sovereign Retirement Solutions . We offer financial planning services in Orlando as well as other areas all over the state of Florida.

1. https://www.irs.gov/retirement-plans/401k-plans-deferrals-and-matching-when-compensation-exceeds-the-annual-limit#:~:text=The%20annual%20limits%20are%3A,401(a)(17))
2. https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2021
3. https://www.irs.gov/publications/p590a

Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.