Saving Strategies for High Earners [Video]

Preparation and saving are key to reaching your retirement goals - but if you are someone who makes multiple six figures or more, you may have encountered some roadblocks. If you are in this category, you know you need to plan now in order to maintain or improve your lifestyle through retirement.  Below are the steps to follow to build your wealth in a tax-efficient manner (and help you sleep at night):

Step #1 - Establish Reserves

It's never a bad idea to have an emergency fund.  If you and your spouse are employed, setting aside three months of living expense is a reasonable target.  If you are single or the sole earner, set your sights on a cash buffer equal to six months of living expenses.  Are you an entrepreneur or an opportunistic executive?  If so, keeping 18 months of living expenses in reserve could help you take advantage of business opportunities and/or maximize job mobility. While interest rates are low, consider high-yield savings/checking accounts.

Step #2 - Take Advantage of Healthcare Accounts

Flexible Savings Account (FSA)- If your company offers an FSA, consider making a 2021 tax-deductible contribution of $2,750 to help cover medical, dental and vision needs. With FSAs, it is use-it-or-lose-it within the calendar year.  You can't carry unused balances into 2022 or future years.

Health Savings Accounts (HSA) - If you have a high deductible health plan, you may be eligible to contribute $3,600 as an individual ($7,200 for a family) to an HSA to pay healthcare expenses. HSAs are funded with pre-tax money and you get tax-free growth and tax-free withdrawals.  This triple tax-free treatment makes HSAs particularly attractive as a savings vehicle.  Additionally, unused balances can be carried over into future years.

Step #3 - Maximize Your 401(k) Contributions

Traditional 401(k) - If you aren’t doing so already, contribute to your company-sponsored 401(k).  For 2021, you can contribute up to $19,500 (or $26,000 if you’re 50 or older) of your pre-tax earnings to your 401(k).  Many employers offer matching contributions, so at the bare minimum, you should contribute enough to maximize your employer's match.  Maxing out your 401k plan contributions should be a high priority.

Roth 401(k) - If you expect your income to increase in the future, contributing to a Roth 401(k) allows you to pay taxes now at lower rates.  The contribution limits are the same as a traditional 401(k) and you won't have to pay taxes on the withdrawals in retirement.  Your company matches may have to go into a traditional 401(k), but this will likely help you manage your tax brackets in retirement.

The employee and employer total contribution limit is $58,000 (plus an additional $6,500 for those 50 and older), but most employers don't match enough to get anywhere near this figure.  However, if you are a business owner, you may be able to contribute up to the limit.

Step #4 - Consider a Backdoor Roth IRA Contribution

A Backdoor Roth IRA contribution involves making a non-deductible IRA contribution up to $6,000 ($7,000 if you are 50 or over) and then converting it into a Roth IRA.  This strategy works if you don't have an existing IRA or have the ability to roll your existing IRA(s) into your 401(k) to avoid the aggregation and pro-rata rules that could lead to income tax upon conversion.

Step #5: Participate in Your Employee Stock Purchase Plan (ESPP)

If your employer offers an ESPP, consider participating in the plan.  Understand how such a stock position would play into your overall asset allocation and investment strategy.  Make sure to map out your selling strategy in advance.

Step #6 - Invest Through a Taxable Investment Account

Now that you have maxed out your tax most tax-efficient accounts, the next best step is to invest through taxable investment accounts.  Keep in mind that long-term capital gains and qualified dividends are taxed at preferential rates. Additionally, tax-efficient investment strategies can further mitigate tax liabilities.

Additional Strategies to Consider if You have Children and/or are Charitably Minded:

529 Plans - You can use your annual exclusion to contribute up to $15,000 to each of your dependents' 529 college savings plans, gift-tax-free.  Alternatively, you can pre-contribute up to 5 years of contributions or $75,000 via a lump sum contribution.  Your spouse can do the same.  Some states even offer state income tax deductions or tax credit for state-sponsored 529 plans.

UTMA/UGMA - These types of accounts can be used to build savings for minors, but be aware of child tax stipulations.

Dynasty Trusts - Depending on your state's laws, dynasty trusts can be useful in providing funds to future generations. 

Donor-Advised Funds - You can contribute assets to a donor-advised fund and take an immediate tax deduction.  You can then invest those assets tax-free and make gifts to any IRS-qualified public charity.

Whatever steps and strategies you choose, be sure to stay up-to-date on contribution limits and eligibility requirements. This can help you avoid any surprise tax bills now or in retirement.  If you need guidance, give us a ring.

GET YOUR TAX-SMART SAVING STRATEGY CHECKLIST (PDF)

BY EMAILING:   INFO@DARRELLCAPITAL.COM

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^{Advisory services are offered through Darrell Capital Management, LLC, an Investment Advisor in the Sate of California.  All content is for informational purposes only.  It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Investing always involves risk and the possible loss of capital. Opinions expressed herein are solely those of Darrell Capital Management, LLC.  The information contained in this material has been derived from sources believed to be reliable but is not guarantee as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Being registered as an investment advisor does not imply a certain level of skill or training. Social media posts reactions and comments should not be viewed as endorsement or testimonials. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any state other than the state of California or where otherwise legally permitted.}