yipid

401(k) and other retirement plan limits can be frustrating for people who make more than $250,000 a year and want to use tax-advantaged investments for their long-term financial goals.

As an employee of a company, you don’t have as much control over your retirement vehicles as a business owner. Your plan may limit you to $23,000 a year if you’re under 50 in 2024. Here’s how to save after you’ve reached your employer-sponsored retirement plan maximum, along with some of the tax implications of each option.

Other retirement plan options

As a high earner, you are unlikely to qualify to contribute fully directly to a pre-tax IRA or Roth. However, there are still some ways to take advantage of your IRA as a great income.

You can contribute directly to a non-deductible IRA as a high-income earner. Although you won’t get any deduction for contributions, the funds in the IRA would grow tax-deferred, meaning you don’t pay income or earnings taxes until you take money out of the account. When you get to distribute money, the growth would be taxable. Your contribution limit if you’re under 50 in 2024 is $7,000.

By the same token, even if individuals are not eligible to make direct Roth contributions, they can make nondeductible IRA contributions and convert them to Roth immediately. This is known as a rear Roth conversion. The same $7,000 limit applies here.

Just like in your employer-sponsored plan, you could end up facing 10% IRS penalties plus applicable federal and state income taxes on the growth if you withdraw these funds before age 59 ½.

You may also be eligible to save into a Simplified Employee Pension (SEP) if you earn income from a side hustle outside of your W2 payments. You can save up to 25% of your adjusted gross income from that income in addition to your 401(k) maximum through your employer.

Health savings accounts

While health savings accounts (HSAs) aren’t technically designed for retirement planning, they can be useful as a supplement to your other retirement savings. Often, especially for people whose employers supplement the cost of their health insurance during their working years, health care costs rise significantly in retirement.

HSAs allow people to save pre-tax money in their plans and spend money tax-free on qualified health expenses. Depending on the HSA provider, you may be able to invest and grow your funds on a tax-deferred basis. In 2024, individuals with single coverage in a high-deductible health plan can contribute up to $4,150 to their HSA (the number doubles for family coverage).

To discourage investors from abusing this privilege, there are huge penalties for withdrawing HSA money for purposes other than qualified medical expenses. You’ll pay a 20% penalty on top of state and federal income taxes for a non-qualified withdrawal.

Insurance products

With the options we’ve discussed so far, we’re already over $34,000 in tax-advantaged retirement savings per year. If you want even more savings capacity for a long-term goal, you can turn to insurance products.

Annuities

Nonqualified annuity contributions receive the same tax treatment as nondeductible IRAs. Contribute money after tax, the income, growth and rebalancing are tax deferred, then you pay income tax on the growth on distribution. There are also penalties for withdrawals before age 59 ½. Unlike nondeductible IRAs, there is no annual contribution limit.

When considering annuity options, investors should be aware that there are many types of annuities on the market. I recommend that you work with a qualified financial professional held to a fiduciary standard to sufficiently evaluate the best option for your personal financial goals and risk tolerance.

Permanent life insurance

When most people hear about life insurance, they immediately think of a death benefit. However, permanent life insurance has a cash value component as well as a death benefit. The cash value of permanent life insurance grows tax-deferred and can be distributed tax-free at any time as long as the policy remains in force. If a policy expires or is surrendered, the investor will owe income taxes on any applicable increase in cash value.

When structured and funded optimally, it can be used to supplement retirement income by adding a tax-free source. However, it is again important to work closely with a fiduciary advisor. When these policies are poorly structured or funded, they can be a costly and burdensome investment.

Tax-efficient investments in a standard investment account

Once you’ve exhausted all the tax-advantaged options, you may want to save additional money in a standard investment account without tax packages. When you do that, some investments are more tax efficient than others. As a high income earner, any additional income, dividends, taxable interest or recognized capital gains generated from your portfolio can add taxes that dilute your returns.

For the fixed income portion of your portfolio, consider municipal bond funds, which can generate federal, state and local tax-free interest payments, depending on the bond issuer. For your equity portion, consider exchange-traded funds (ETFs) over mutual funds. Because of the way they trade, ETFs generally generate fewer annual fees than mutual funds.

Conclusion

Once you’ve maxed out your retirement plan contributions, there are many ways to save more money for retirement if you’re feeling behind, have lofty retirement goals, or want to achieve financial independence early in life. For other retirement plan options to supplement their employer plan, individuals can turn to a SEP, nondeductible IRA, or a possible Roth IRA conversion. HSAs can provide investors with a tax-efficient method of paying for retirement health care expenses. If you need cover, insurance products, when properly vetted and structured, can also offer tax benefits with unlimited contribution amounts. When other tax-advantaged options are exhausted, high earners can also invest in standard investment accounts as tax-efficiently as possible.

This informative and educational article does not provide or constitute and should not be relied upon as tax or financial advice. Your unique needs, goals and circumstances require the individual attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not approve, endorse or make any representations regarding the accuracy, completeness or appropriateness of any part of the content linked to this article.

Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI and TN), and offers annuity and insurance products through Equitable Network, LLC, doing business in California as Equitable Network Insurance Agency of California, LLC). Financial professionals may transact and/or answer questions only in states where they are properly qualified. Any compensation that Ms. Jones may receive for publishing this article is earned separately from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-6878404.1 (08/24)(exp. 08/26)