Maximize your wealth: Advanced tax-saving strategies for high-income earners
By: Yogesh Prasad, CFA, CAIA
If you’re earning a high income and believe you’re doing all you can to maximize your savings, think again! Beyond maxing out your retirement plans, there are advanced strategies that can help you make the most of your hard-earned money. This newsletter dives deep into these opportunities to empower you with the tools to take your financial planning to the next level.
1. 2025 contribution limits: Are you maximizing your savings?
Here’s a quick breakdown of how much you can contribute to various accounts in 2025:
Account type | Under age 50 | Age 50 or older | Employer contribution limit |
|---|---|---|---|
401(k), 403(b), 457(b |
$23,500 |
$31,000 |
Up to $70,000 total |
Traditional & Roth IRAs |
$7,000 |
$8,000 |
N/A |
SIMPLE IRA |
$16,500 |
$20,000 |
1–3% salary match or 2% non-elective contribution |
SEP IRA |
N/A |
N/A |
Up to 25% of compensation, max $70,000 |
Health Savings Account (HSA) |
$4,300 (Individual), $8,550 (Family) |
Add $1,000 if 55+ |
Employer contributions included in max |
Are you leveraging all these opportunities? For instance, many people overlook the potential of HSAs, which provide triple tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses.
2. Unlocking the Roth advantage: Income limits for 2025
Not sure if you qualify for a Roth IRA? Here’s how your income affects eligibility:
Filing status | Income | Contribution |
|---|---|---|
Married filing jointly |
< $236,000 |
Full ($7,000/$8,000) |
$236,000–$246,000 |
Reduced | |
≥ $246,000 |
Not eligible | |
Single or head of household |
< $150,000 |
Full ($7,000/$8,000) |
$150,000–$165,000 |
Reduced | |
≥ $165,000 |
Not eligible |
Pro tip:
High earners can still benefit from Roth IRAs using strategies like the Backdoor Roth.
3. Advanced strategies for high earners
A. The Backdoor Roth
This strategy allows you to contribute to a Roth IRA, even if your income exceeds the limit. Here’s how it works:
- Step 1: Contribute to a Traditional IRA ($7,000/$8,000 based on age).
- Step 2: Convert it to a Roth IRA.
- Result: While you’ll pay taxes on the conversion amount, all future growth is tax-free.
Example: Imagine converting $8,000 annually. Over 10 years at a 7% growth rate, this could grow to $114,000—all tax-free!
Backdoor Roth IRA conversion guidelines
When executing a backdoor Roth IRA conversion, it’s crucial to adhere to specific rules to avoid penalties. The conversion must follow one of three approved methods: a rollover, where you personally transfer funds from your traditional IRA to a Roth IRA within a 60-day window; a trustee-to-trustee transfer, in which your traditional IRA provider directly sends the money to your Roth IRA provider; or a same-trustee transfer, where the conversion occurs between accounts at the same financial institution. Understanding and following these guidelines is essential for a successful and compliant backdoor Roth IRA conversion.
B. Mega backdoor Roth
For those with 401(k) plans, after-tax contributions can be a game-changer:
- Contribute the standard $30,500 (if age 50+).
- Add employer matching ($15,250).
- Use after-tax contributions to hit the $76,500 annual limit.
- Roll over after-tax dollars to a Roth IRA for tax-free growth.
Example: A 50-year-old employee maximizes contributions with $30,750 in after-tax funds, creating a significant growth opportunity in their Roth IRA.
How to set up a mega backdoor Roth
Setting up a mega backdoor Roth requires careful consideration and planning. First, review your workplace retirement plan to ensure it offers the necessary features and that you’re eligible. Consult with a financial advisor or tax professional to determine if this strategy aligns with your financial goals and to understand its tax implications. If deemed appropriate, proceed by making after-tax contributions to your 401(k) and then periodically rolling these funds into a Roth IRA or converting them to a Roth 401(k) within your plan. Some employers offer an automatic conversion feature, simplifying the process. Remember, this advanced retirement savings strategy may not be suitable for everyone, so thorough research and professional guidance are essential before implementation.
The mega backdoor Roth strategy comes with several drawbacks. It imposes a five-year waiting period for penalty-free withdrawals, can be challenging to implement in multi-employee plans, and locks away contributions until retirement. The process is complex, often requiring professional guidance, and must be executed swiftly to avoid tax complications. Additionally, if not done correctly, any growth may be subject to ordinary income tax rates. These factors make it a sophisticated financial maneuver that may not be suitable for all investors.
4. Account definitions: Simplified for clarity
Account type | Key features |
|---|---|
Traditional IRA |
Tax-deductible contributions; earnings taxed upon withdrawal. |
Roth IRA |
Contributions not deductible; earnings grow and distribute tax-free. |
SEP IRA |
Employer-funded; allows up to 25% of compensation, max $70,000. |
SIMPLE IRA |
Employer-sponsored with salary deferrals; offers matching or non-elective contributions. |
Real-life scenario: How these strategies work together
Meet Sarah:
- Tax year: 2024
- Age: 50
- Income: $250,000/year
- Goal: Maximize retirement savings
Sarah maxes out her 401(k) with $30,500, receives a $15,250 match from her employer, and contributes $28,500 in after-tax dollars to her plan. She rolls the after-tax contributions into a Roth IRA, creating a robust tax-free growth bucket for her retirement.
Total Savings for the Year: $76,500.
Take action: Are you leaving money on the table?
- Review your contributions: Max out every possible account.
- Consult your financial advisor: Explore advanced strategies like the Backdoor Roth or Mega Backdoor Roth.
- Optimize your tax strategy: Speak with your tax professional to minimize liabilities.
Why this matters
High-income earners have unique opportunities—and unique challenges. Small tweaks in your financial plan can lead to massive long-term benefits. Don’t let these opportunities pass you by.
References
“401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000 “, www.irs.gov
“Backdoor Roth IRA: How It Works and How to Set One Up”, www.nerdwallet.com
“401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000”, www.fidelity.com
Disclaimer
The information provided in this newsletter is for educational and informational purposes only and should not be considered financial or tax advice. Always consult with a qualified financial advisor or tax professional before making any investment decisions or implementing strategies such as the mega backdoor Roth IRA. Individual circumstances vary, and the strategies discussed may not be suitable for everyone. The authors and publishers of this newsletter are not responsible for any losses or damages resulting from reliance on the information provided herein.
