Retirement Plan Strategies for High-Income Earners

High-income professionals and business owners face a unique retirement savings challenge. Standard contribution limits on accounts like 401(k)s are often insufficient to maintain their lifestyle in retirement, and high incomes can prevent direct contributions to a Roth IRA. For 2025, the ability to contribute to a Roth IRA phases out for single filers with modified adjusted gross incomes between $146,000 and $161,000 and for joint filers with incomes between $240,000 and $260,000.

This reality requires looking beyond basic retirement planning to more complex strategies. These options allow for higher savings rates and greater tax efficiency by layering various accounts. Navigating these options requires understanding the tax code and specific plan provisions. This approach involves using the full spectrum of available retirement savings tools to maximize tax-advantaged growth before using non-retirement vehicles.

Maximizing Employer Sponsored Plans

The starting point for retirement savings is an employer-sponsored plan, such as a 401(k). The first step is to contribute the maximum employee deferral amount, which for 2025 is $23,000. Individuals age 50 and over can contribute an additional $7,500, and a 2025 provision allows those aged 60 to 63 to make a higher catch-up contribution of $10,000 or 150% of the standard catch-up amount, whichever is greater.

Some 401(k) plans permit a “Mega Backdoor Roth” strategy, allowing for contributions beyond the standard employee limits. This requires the plan to allow both after-tax, non-Roth contributions and in-plan Roth conversions or in-service distributions. This strategy leverages the overall contribution limit for an employee, which for 2025 is $69,000. This total cap includes employee deferrals, employer contributions like a match, and the after-tax amounts.

To execute this, an employee first maxes out their standard 401(k) deferral. They then contribute on an after-tax basis up to the overall plan limit. These after-tax contributions are immediately converted to Roth dollars within the 401(k) or rolled into a Roth IRA, allowing the funds to grow and be withdrawn tax-free in retirement.

Health Savings Account

A Health Savings Account (HSA) is a supplemental retirement vehicle for those enrolled in a high-deductible health plan (HDHP). For 2025, an HDHP has a minimum deductible of $1,650 for self-only coverage or $3,300 for family coverage. HSAs offer a triple-tax advantage: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are tax-free.

The 2025 maximum HSA contribution is $4,300 for an individual and $8,550 for a family, with an additional $1,000 catch-up for those 55 and older. The funds do not have to be spent annually and can be invested for long-term growth.

At age 65, an HSA functions like a traditional IRA for non-medical spending, where withdrawals are subject to ordinary income tax but escape the 20% penalty that applies to earlier non-qualified withdrawals. Withdrawals for medical expenses remain tax-free, making the HSA useful for managing healthcare costs in retirement.

Retirement Options for the Self Employed and Small Business Owners

Self-employed individuals have access to retirement plans with high contribution limits. A Simplified Employee Pension (SEP) IRA is funded exclusively with flexible employer contributions from the business to the owner’s personal retirement account. The business can contribute up to 25% of compensation, subject to the overall annual limit of $69,000 for 2025. For the self-employed, this is based on net adjusted self-employment income, which works out to about 20% of net earnings.

A Solo 401(k) is available to business owners with no employees other than a spouse. This plan allows the owner to contribute as both the “employee” and the “employer.” The employee contribution can go up to the annual deferral limit of $23,000 in 2025, plus any applicable catch-up contributions. This structure often allows for a larger total contribution at lower income levels compared to a SEP IRA.

As the employer, the owner can contribute an additional amount, up to 25% of compensation. The combined employee and employer contributions are subject to the same $69,000 overall limit. Solo 401(k) plans also permit plan loans and Roth contributions, features not available in a SEP IRA.

Exploring Defined Benefit and Cash Balance Plans

Defined benefit plans differ from defined contribution plans like 401(k)s. Instead of a variable outcome based on contributions and investment performance, a defined benefit plan promises a specific retirement payout determined by a formula. A popular modern version is the cash balance plan.

A cash balance plan states the promised benefit as a hypothetical account balance that grows with annual contribution credits and a guaranteed interest rate. This provides a clear account value, similar to a defined contribution plan. The main advantage is that it allows for the largest tax-deductible contributions of any retirement plan.

An actuary calculates the required annual contribution to fund the promised benefits, considering factors like age, compensation, and years until retirement. Because older participants have fewer years for their money to grow, the actuary can justify much larger annual contributions for them to reach their target benefit, often exceeding $100,000.

These plans are well-suited for established professionals like doctors or lawyers looking to accelerate savings. They are often paired with a 401(k) plan, allowing owners to contribute to both simultaneously for maximum tax-deductible savings.

Understanding Nonqualified Deferred Compensation Plans

Nonqualified deferred compensation (NQDC) plans are contractual agreements for an employer to pay an employee at a future date. These plans are not subject to the same contribution limits as 401(k)s, allowing executives to defer portions of their salary or bonus. The employer agrees to pay this deferred amount, plus any earnings, at a specified future time. These plans are often used to provide retirement benefits above and beyond what is possible through qualified plans.

A significant risk is associated with NQDC plans. The deferred funds are not held in a separate trust and remain an unsecured asset of the company. If the company enters bankruptcy, the employee becomes a general creditor and could lose the entire deferred amount.

All NQDC plans must comply with Internal Revenue Code Section 409A, which governs the timing of deferral elections and distributions. Deferral elections must generally be made in the year before the compensation is earned. Failure to comply can result in immediate taxation of all deferred amounts, plus a 20% penalty and interest.

The Role of Taxable Investment Accounts

After maximizing tax-advantaged accounts, the next step is a taxable brokerage account for overflow savings. While these accounts do not offer tax deductions or deferral, investments can be managed for tax efficiency.

One strategy is asset location, which involves placing assets in accounts where they will be taxed most favorably. Assets generating significant taxable income, like high-yield bonds, are best held in tax-advantaged accounts. Tax-efficient assets, such as growth stocks with low dividends or municipal bonds, are better suited for a taxable account.

Tax-loss harvesting is another technique for minimizing taxes. This involves selling investments at a loss to offset capital gains from profitable sales. If losses exceed gains, up to $3,000 can be used to offset ordinary income annually, with any remainder carried forward.

When tax-loss harvesting, investors must avoid the wash-sale rule. The IRS prohibits deducting a loss if the same or a “substantially identical” security is bought within 30 days before or after the sale. This prevents investors from claiming a tax loss while maintaining their investment position. This rule applies across all of an individual’s accounts, including IRAs and accounts belonging to a spouse.