How High Earners Can Save for Retirement Without an Employer Plan
Some of our clients find that their hands seem to be tied when it comes to saving for retirement. While they make enough money to stash the maximum $18,500 in an employer plan, their workplace does not offer a 401(k) or 403(b). This is certainly not optimal, but, there are some options to help put you on the right track to saving for your future.
How much do you need to save for retirement? It depends on how much you want to spend in retirement. But, no matter what the number is, it’s better to start early to take advantage of compounding and long-term growth. Here’s how to take the matter of future financial freedom into your own hands.
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Open a Traditional IRA
Face it, one of the best ways to reduce your taxes is to max out your 401(k) contribution. The amount you contribute comes directly off the top of the earned income you report on your taxes. Because your employer doesn’t offer a plan, your taxes just went up! So, do the next best thing – max out your Traditional IRA at $5,500 (over 50? Max = $6,500). Why not a Roth IRA? If you’re a high earner, you probably don’t qualify for a Roth IRA, and, if you don’t have a plan through your employer, your Traditional IRA contributions are probably tax deductible. Note that once you make a Traditional IRA contribution there is an opportunity to convert your Traditional IRA over to a Roth IRA. You lose the tax deduction and gain tax-free income for life, a decision that should definitely be reviewed with your advisor on a case-by-case basis.
Fully fund your HSA
Not everyone has a Health Savings Accounts and it may not be appropriate for everyone. If this type of high deductible plan is right for you there can be tax savings now and in your future. First of all, many of our clients are finding that they have a significant employer contribution to their HSA which is free money. Additionally, if you are able to fund an HSA they are the triple-win providing pretax contributions, tax-free compounding, and tax-free withdrawals for qualified healthcare expenses. And, unlike Flexible Spending Account, you do not need to use all of the money you defer here within the year. These accounts are portable and you can often invest a portion of the money in your HSA, allowing it to grow year over year.
Get some discipline
If there is one thing about an employer plan that helps you save, it’s that it automatically comes out of your paycheck before you even see it. Do yourself a favor and set up an automated transaction to save an additional amount each month for your retirement. To determine how much to put aside, check out our Retirement Calculator.
Turn to taxable accounts
When you’ve exhausted your tax-deferred and tax-free saving options, start investing the automated savings in plain-old taxable accounts. Of course, income and capital gains distributions in these accounts are taxable as they’re incurred, so invest as tax efficiently as possible. Start with broad-market equity index funds and exchange-traded funds, as well as tax-managed funds that tend to make few capital gains pay outs. For retirement saving, avoid mutual funds that have a history of making big capital-gains distributions and consider the tax consequences of holding bond funds that tend to throw off a good deal of taxable dividends. Be sure to weigh asset allocation with your risk tolerance to build a portfolio that meets your long-term needs and keeps taxes lower.
Talk to your boss
If you’re a high-income earner at a job that does not provide a retirement plan, most likely it’s a start-up or small company. It’s understandable that these small businesses are wary to take on more expenses. Technology has come to the rescue making it easier (and less expensive) than ever to offer retirement plans to your employees. The major players, like Vanguard, Fidelity and Charles Schwab offer small business retirement plan solutions that are low cost and offer a wide variety of well-designed, appropriate investments. And not all retirement plans require matching from employers (although that would be a great perk), so yours can start slow by offering a plan that let’s you save more for your future and reduce your taxes now.
If it’s time to get your portfolio on-track for financial success, schedule a call with me to start the discussion.