How to save for retirement when you make 6 figures
- It may feel like your options for retirement savings are limited if you make over $100,000.
- High earners aren't entitled to as many tax benefits on retirement contributions, but there are still ways to optimize your money.
- Max out your workplace plan before turning to a Roth IRA, or if your income is too high, a traditional IRA. If you still want to save more for the future, invest through a brokerage account.
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If a comfortable retirement is a priority for you, it's smart to bump up your savings rate as your income rises.
Unfortunately, the government limits high earners when it comes to tax-advantaged retirement savings. If you make more than $100,000, here's a basic roadmap to follow when saving for retirement.
1. Max out your workplace plan
Whether you make $200,000 a year or $50,000 a year, this is where you should start. If your employer-sponsored retirement plan gives you the opportunity to divert some of your own income into an investment account, take it.
Not only are you saving pretax dollars, but your employer may also make contributions on your behalf - typically by matching yours up to a certain percentage. All this money will grow tax-free until you're ready to withdraw it, pay regular income tax, and spend it.
Some 401(k) plans have a Roth provision allowing after-tax salary deferrals. If you're in a lower tax bracket now than you think you'll be in when retirement rolls around, contributing to a Roth 401(k) could be a good strategy to generate some tax-free income during retirement (though you'll still have to pay tax on investment earnings as they're withdrawn).
Workplace plans are made even better by their high annual limits. In 2020, an employee can contribute up to $26,000 ($19,500, plus a $6,500 catch-up if you're over age 50) to a profit-sharing 401(k).
In total, contributions to a single employee's defined contribution plan - including their own deferrals and employer contributions - max out at $56,000 or 100% of their compensation, whichever is lower. That's more than you'll be able to save, tax-deferred, anywhere else.
2. Turn to a Roth IRA
Roth IRAs are funded with after-tax dollars. You can open one at almost any brokerage and start funding it immediately. Whatever you contribute to a Roth IRA is yours to withdraw tax-free.
In 2020, you can contribute up to $7,000 - $6,000, plus a $1,000 catch-up if you're over 50 - to IRAs, both traditional and Roth combined, if your modified adjusted gross income (MAGI) is less than $139,000 as a single filer and $206,000 as a joint filer.
If your MAGI falls between $124,000 and $139,000 as a single filer and $196,000 and $206,000 as a joint filer, your allowable contributions will be reduced.
3. Consider a traditional IRA
If you make too much to qualify for a Roth IRA, a traditional IRA is your next stop. There's no income cutoff for contributing to a traditional IRA; the only prerequisite is that you have earned income at all.
What is limited with a traditional IRA is how much of your contribution you can deduct on your tax return. Your eligibility is based on two things: your modified adjusted gross income (MAGI) and whether you actively participate in your workplace retirement plan. Both can limit the amount you're able to deduct each year you contribute.
If you're a single filer earning six figures in 2020 and you save in a workplace retirement plan, you won't be able to deduct any of your traditional IRA contribution because deductibility cuts off completely at $75,000. That is to say, you can still save in a traditional IRA, but you won't be able to claim any of it on your tax return.
If you're a married filer and you contribute to a workplace plan, your AGI can reach $103,000 before the IRS begins to limit your deductible contributions.
4. Open a taxable investment account
Taxable investment accounts don't offer the same tax advantages as retirement plans, but they're a good option if you need to sock away more money for retirement than those plans allow.
If you have time to grow your money, a brokerage account will offer much greater growth potential than a savings account, a vast array of investment options from stocks and bonds to mutual funds, and access to your money before retirement if you need it.
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