At the heart of it, saving for retirement isn’t terribly complicated. You know you need to max out your employer-sponsored 401K so you can receive your employer match and allow your investments the opportunity to grow tax-free. This is undoubtedly the best place to start. But if you’re a high earner, your 401K won’t be nearly enough to fund your retirement nest egg. So where do you invest next?
401K Limits Aren’t Enough
As we head into 2023, the elective deferral limit for anyone participating in a 401k plan will be $22,500 (an increase from $20,500 in 2022). With the catch-up contribution limit, that amount is $30,000 for those aged 50 and over. But for high earners, these annual limits won’t be enough to create the income you need to continue your current lifestyle in retirement.
So, to create that comfortable retirement you’ve always dreamed of, it’s time to put more of your money to work.
IRAs—Traditional and Roth
Individual Retirement Accounts (IRAs) are the natural next place to save as they are also tax advantaged. But, there are two types—traditional IRAs and Roth IRAs. The main difference in these two types of accounts is when the tax savings are captured. Traditional IRAs utilize pre-tax money for contributions and are taxed upon withdrawal in retirement, whereas Roth contributions are funded with post-tax dollars, but retirement withdrawals are tax-free.
However, Roths have no Required Minimum Distributions (RMDs). This type of account allows you to begin withdrawing money on your timeline and not the one that is determined by the IRS.
In 2023, you’ll be able to contribute up to $6,500 to both types of IRAs – $7,500 for those over 50.
Keep in mind, though, that Roth IRAs do have income limits:
- For single filers: $138,000 to $153,000
- For married couples filing jointly: $218,000 to $228,000
- For married and filing separately: up to $129,000
Chances are, you probably earn too much to open a Roth IRA, but don’t worry. You can still take advantage of the Roth account benefits by converting traditional IRA fund into a Roth through an annual Roth Conversion.
Health Savings Account
After you’ve maxed out your 401K contribution, funded a traditional IRA and perhaps performed a Roth IRA conversion, you should turn your sights toward Health Savings Accounts. Their name might be throwing you for a loop, but HSAs can be great retirement saving vehicles. Here’s why.
Health Savings Accounts are heralded for their triple-tax advantage: they are funded with pre-tax dollars, experience tax-free growth, and qualifying medical expenses are covered with tax-free withdrawals. Considering the average American couple will spend $315,000 in out-of-pocket medical expenses in retirement, HSAs provide a way to save for them while also generating tax-free retirement income. Or, you can withdraw the funds and use them as you need (for non-medical related expenses) once you have reached age 65 and simply pay regular income tax on those withdrawals.
Keep in mind, only folks with a high-deductible health plan are eligible to open an HSA. However, if you lose or change away from your high-deductible plan, your HSA remains in your possession and the money can remain invested.
Brokerage Accounts, Real Estate, & Business Ventures
Once you have maxed out your tax-advantaged options, there are several options to choose from when it comes to investing for the future. If you’re comfortable with a little more risk, the following have proven great ways to supplement retirement income.
Brokerage Accounts (Taxable): Taxable brokerage accounts remain the most flexible for high earners with a substantial capacity to save. There are no income limits, annual contribution limits, and the assets can be accessed at any time for any reason. While you won’t benefit from any tax breaks with this account, you are in complete control.
Real Estate: There are multiple ways to invest in real estate. You can invest in residential properties to rent out, buy and flip houses, invest in a company that buys and flips houses, purchase commercial property to lease, or even invest in a Real Estate Investment Trust (REIT). This type of investing is typically best for investors with large cash reserves and an understanding of the real estate market.
Business Ventures: Since 2015, investors have been able to invest in startups and small businesses through brokers or crowdfunded campaigns. This can be an exciting option, but typically quite risky. You’ll want to make sure you do your due diligence and to familiarize yourself with what your investment entails and what your compensation options look like. Or, if you want to keep things closer to home, you can choose to invest in a friend of family member’s business. But, like with any large transaction, be sure you have the proper legal paperwork in place before handing over your money. This type of investment is attractive to those passionate about entrepreneurship and comfortable with risk.
Fill One Bucket, Then the Next
If you want to maintain or enhance your quality of life in retirement, it’s important that you put your money to work as efficiently as possible to keep from overpaying in taxes or missing out on potential income. We can help. If you’re ready to put your money to work, let’s chat. We can help you determine which savings vehicles will enable the happy, comfortable, and stress-free retirement you need.
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