High-Income Earners May Have Trouble Saving For Retirement: Your Guide to Overcoming Some Surprising Roadblocks

You know preparing and saving early is key to reaching your retirement goals - but as someone who makes six figures or more, you may have encountered some roadblocks. High-income earners face several financial hurdles when it comes to preparing for retirement, as their income can actually limit them from utilizing certain tax-advantaged retirement savings strategies. If you make six figures or more, you know you need to plan now in order to maintain your lifestyle through retirement. Here are four things highly compensated executives and employees like you can do to save for retirement.

Why Are High-Income Earners at a Disadvantage?

The IRS offers several tax-advantaged retirement savings options. Most of these options, however, offer some sort of income cap - making it harder for high earners to take advantage of these tax-saving strategies. But high earners face the same challenge as moderate- to low-income earning employees: sustain a similar lifestyle in retirement by maintaining financial independence. When high earners are limited in their options for saving for retirement, it can make reaching their goals for retirement more challenging.

Retirement Saving Strategies

Once you’re able to identify the roadblocks you may be facing, focus your attention on the retirement saving strategies that may work best for you and your family.

Strategy #1: Contribute to a 401(k)

If you aren’t doing so already, contributing to an employer-sponsored 401(k) plan is an effective place to start saving for retirement. You may defer up to $19,500 (or $26,000 if you’re 50 or older) of your pre-tax earnings toward your employer-sponsored 401(k) plan.¹ Many employers will offer matching contributions as well, up to a certain percentage of your contributions. The total contribution limit for a 401(k) plan in 2021 is $58,000 (plus an additional $6,500 for those 50 and older) or 100 percent of an employee’s compensation, whichever is lower.¹

The salary limit for deferring compensation is $280,000 for 2021. If you make more than this amount, this doesn’t mean you can’t contribute to your 401(k) plan. Employees can defer compensation to their 401(k) plan throughout the year, until their year-to-date earnings reach $280,000. Once that maximum is reached, employees can no longer defer earnings toward their 401(k) plan.¹

As a high earner, your 401(k) will likely offer the highest contribution cap for tax-deferred retirement savings - making it an important cornerstone of your retirement saving strategy.

Strategy #2: Traditional IRA 

Roth IRAs allow retirees to make tax-free withdrawals in retirement, meaning they can be appealing for those saving for retirement. Unfortunately, it may not be an option for some high-earners. If your modified adjusted gross income is more than $140,000 as a single filer or $208,000 as a joint filer, you are not eligible to contribute after-tax dollars to a Roth IRA account. If you make between $125,000 and $140,000 as a single filer or $198,000 and $208,000 as a joint filer, you may be eligible to contribute a reduced amount.²

A traditional IRA, however, does not have an income limit, which makes it an available option for high earners. The only prerequisite is that you earn any income at all. It’s important to note, however, that you may be limited to how much of your IRA contribution you can deduct on your tax return.

Further, consider your spouse. If you are the primary wage earner in the family and your spouse does not contribute to a retirement plan at work, they may be able to contribute to an IRA even if they don't earn income. Read more about the Kay Bailey Hutchison Spousal IRA Limit on the IRS website.

How much you are able to deduct from your taxes will depend primarily on two things:³  

• Your modified adjusted gross income
• Whether or not you actively contribute to your employer-sponsored retirement plan (such as a 401(k))

Strategy #3: Backdoor Roth IRA

Building on the strategy above, those interested in tax-free withdrawals in retirement - but aren't eligible to utilize a Roth IRA - may benefit from a backdoor Roth IRA. As the name suggests, this strategy offers high-income earners a roundabout entrance into placing their after-tax dollars into a Roth IRA account. Be warned that this strategy does not work as well if you have a large IRA, or Rollover IRA, balance.

To do this, you'll have to:

1. Open and contribute to a traditional IRA account.
2. Have an account administrator provide the paperwork and instructions for converting your traditional account into a Roth IRA.
3. Prepare to pay taxes on the money in the account and any gains it may have incurred.

If this sounds like an option you may be interested in pursuing, your financial advisor or CPA will be able to offer more guidance and instruction regarding this process.

Strategy #4: Health Savings Account

If you are enrolled in a High Deductible Health Insurance Plan, you may be able to contribute money pre-tax to a HSA to pay for qualified medical expenses. These funds may go toward paying for deductibles, copayments, coinsurance, and some other expenses, but may not be used to pay premiums. You may carry forward the unused balance from year-to-year and you can contribute until Medicare-eligible at age 65. If you retire with a balance, you can use the fund toward medical expenses in retirement, or even rollover the balance to your IRA.

The maximum Family contribution is $7,200 for 2021, $3,600 for an individual. There is an additional $1,000 catch-up contribution available if you're over the age of 55.

If you’re earning six figures or more, it may be helpful to work with a financial advisor or retirement specialist who can help you understand your savings options. Depending on your age, goals for retirement and current financial standings, together you may determine a more aggressive strategy, such as a taxable investment account, may be a viable option. Whatever strategy you choose, be sure to stay up-to-date on contribution limits and eligibility requirements. This can help you and your retirement savings avoid any surprise tax bills now or toward retirement.