There are many great ways for a high-income earner to save for retirement, some strategies that I even use in my family’s financial planning. One thing I have in mind for today pertains to singles/couples in the 30% plus tax bracket who want a guide to managing and setting themselves up for a lower tax bracket in retirement. Thinking back, I am fine paying taxes today in lower brackets when, from 1965-1981, they were topping out at 70%, so I don’t feel too bad doing this now [Tax Foundation, 2013]. I think these are great ideas for long-term planning.

Health Savings Account (HSA)

• If you’re enrolled in a high-deductible health plan (HDHP), you can contribute to an HSA, which offers a triple tax advantage:
  • Contributions are tax-deductible.
  • Growth is tax-free.
  • Withdrawals are tax-free for qualified medical expenses.
• HSAs can also function as a retirement savings vehicle. After age 65, you can use HSA funds for non-medical expenses without penalty (although withdrawals will be taxed like traditional 401(k) withdrawals for non-medical uses). Contributions in 2024 are capped at $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up for those 55 and older.

Roth 401(k)

• A Roth 401(k) offers tax-free withdrawals in retirement. High-income earners in the accumulation phase might prefer this option, particularly if you expect your income and tax rates to be high in retirement.
• Since the income limits on Roth IRAs don’t apply to Roth 401(k)s, even high earners can contribute.

Backdoor Roth IRA Strategy

• High-income earners often exceed the income limit for direct Roth IRA contributions. A Backdoor Roth IRA allows you to contribute to a traditional IRA (non-deductible if you’re a high earner) and then convert those contributions to a Roth IRA.
• This strategy lets you take advantage of the Roth’s tax-free growth, even if you’re over the income limit for direct contributions.

Taxable Brokerage Account

• Consider contributing to a taxable brokerage account once you’ve maxed out your tax-advantaged accounts. While this doesn’t offer tax-deferred growth or tax-free withdrawals of other accounts, it allows for greater flexibility. There are no contribution limits or early withdrawal penalties.
• By investing in instruments that yield long-term capital gains, you can benefit from a lower tax rate (0%, 15%, or 20%) compared to ordinary income tax rates.

Now, there are more options to consider, like the potential Mega Backdoor Roth 401K – not every plan has this option, and it is at the employer’s discretion, but here is how that works:

Mega Backdoor Roth 401(k)

• Some employers allow after-tax contributions to your 401(k) beyond the regular contribution limit (up to a combined limit of $66,000 in 2024, including employer contributions).
• These after-tax contributions can then be rolled over into a Roth IRA or converted to a Roth 401(k), allowing you to save even more in a Roth account, which can grow tax-free.

These are all great strategies. Some argue that taxes will be higher in the future, so being able to lock in your tax payment now might be a better solution than down the road. We like to tell our clients that it’s a lot easier to cash flow & budget in retirement if you have already paid the bulk of your taxes on your retirement accounts. It takes much of the guesswork out on potential liabilities you will owe. Sometimes retirees have an emotional strain/block when their tax bill comes due in retirement because they didn’t consider the IOU to the IRS. 

As always, check out our website and blogs for more info on these strategies.  

About Chris

Chris Heisten is the President and Founder of Heisten Financial LLC, a fee-only financial planning firm focusing on giving clients back their time so they can spend it doing what’s most important to them. Acting as a true fiduciary for his clients, Chris aims to solve their financial pain points by incorporating tax planning saving strategies and moving them toward financial freedom. In the financial industry since 2007, Chris has partnered with families with the same questions and complexities as he and his family. He guides the journey through life, striving to instill calmness and a sense of direction as he simplifies the complex. He loves seeing clients experience relief when they achieve what they thought was impossible.

Chris graduated from the University of Maine, where he played hockey on a scholarship, and retired from professional hockey in 2007. In the community, he remains engaged, serving as a youth hockey coach. Chris holds the CERTIFIED FINANCIAL PLANNER™. Outside the office, he enjoys trying new food and wine, reading, traveling, playing golf and hockey, fat tire biking, and donating to local charities. His passions include being a husband and dad, lake life with the family, watching his son and daughter play sports, and spending time with his wife. To learn more about Chris, connect with him on LinkedIn.