Guide to High-Earning Retirement Investment Strategies

If you earn a high income, planning for retirement can present unique challenges. You may quickly reach contribution limits through traditional channels such as IRAs or 401(k)s before committing the 15% of your income needed for savings to secure a comfortable future. Understanding alternative and advanced retirement options is crucial for ensuring a stress-free retirement.

What is a Traditional IRA?

A Traditional IRA allows you to contribute pre-tax income, growing your savings tax-deferred until withdrawal.

You won't pay taxes on contributions or earnings until you partially or fully withdraw funds. Contributions may be tax-deductible depending on your income and participation in other retirement plans.

Early withdrawals before age 59½ often incur penalties, so planning accordingly is necessary.

Depending on your income level and tax situation, you might deduct your contributions from your taxable income.

What is a Roth IRA?

Contributions to a Roth IRA are made with after-tax dollars, meaning taxes are paid upfront.

While contributions are not tax-deductible, earnings grow tax-free, and qualified withdrawals are also tax-free.

You can withdraw funds tax-free starting at age 59½, provided certain conditions are met, which is advantageous for those expecting higher taxes in retirement.

This setup is especially beneficial if you anticipate being in a higher tax bracket during retirement.

Similarities between Traditional and Roth IRAs

Both account types support contributions for spouses—if income limits are met.

The annual contribution deadline is typically April 1, with limits of $5,500 under age 50, or $6,500 for those over 50.

Eligible earned income includes wages, salaries, tips, and certain self-employment income.

Other sources like disability benefits or strike benefits may also qualify as earned income for contributions.

Interest, dividends, social security, alimony, or child support are not considered earned income for IRA contributions.

What is a Defined Contribution Plan?

A Defined Contribution Plan involves contributions from you or your employer, without a guaranteed payout at retirement.

Examples include employer-sponsored 401(k)s, funded via pre-tax deductions.

Employers often match a percentage of employee contributions, boosting your savings.

These plans help accumulate retirement funds and allow investment growth over time.

You won't pay taxes on contributions or earnings until disbursement begins, typically after age 59½.

In addition to regular wages, there may be employer contributions like profit-shares based on company performance.

Contribution amounts vary by employer, earnings, and other factors—consult financial advisors for tailored guidance.

What is a Pension Plan?

Historically, many employers provided guaranteed income through defined benefit pensions for a set period.

Due to costs, many companies have phased out these plans, replacing them with defined contribution options.

Understanding your retirement benefits and planning accordingly ensures financial security after your career.