Retirement Tax Strategies For High-Income Earners

Don Dirren

April 11, 2023

When it comes to retirement tax strategies for high-income earners, there are several options available. These options can help you save on taxes and reduce overall taxable income.

First, consider contributing to your employer’s retirement plan. This can reduce your taxable income and make you eligible for tax-free withdrawals in retirement.

Contribute to Tax-Free Savings Accounts

High-income earners should consider contributing to tax-free savings accounts, such as a TFSA, RRSP, or HSA. These can be used for various long-term goals, such as retirement, education, or healthcare expenses.

A hierarchy of tax-preferenced investment accounts ranges from triple-tax-preferenced options, such as an HSA, to accounts with no specific tax preferences, such as a taxable brokerage account. This hierarchy will allow high-income earners to maximize their retirement savings and limit their tax liabilities.

Relocate to a No-Income-Tax State

One of the most popular retirement tax strategies for high-income earners is to relocate to a state that doesn’t have an income tax. But if you’re considering moving to a no-income-tax state, you must weigh your overall state tax burden against your financial picture.

States that don’t have income taxes typically rely on other sources of revenue to support their governments. These can include property, sales, and gasoline taxes.

Donate to a Charity

Donating to a charity is easy for high-income earners to reduce their tax bills. It also helps to support causes that are important to you.

The first step is to determine which charities are doing work that you agree with. Online resources like Charity Navigator will help you find these organizations.

Form a Corporation or LLC

Forming a corporation or LLC can help you reduce taxes or defer income for a year. For example, if your employer pays you a large year-end bonus and you have high net taxable income, you can defer the payment to a future year to lower your overall tax rate.

Corporations and LLCs protect owners from liability, but your right business structure will depend on your specific needs. When deciding which entity to choose, consider how you want to manage your business, pay taxes and attract outside investment.

Make Donations to a Private Family Foundation

Many high-income earners find that a private family foundation is an ideal way to make charitable contributions. It offers tax benefits and more philanthropic flexibility than other giving vehicles.

A private family foundation is a separate legal entity granted tax-exempt status by the IRS. It can be funded by cash gifts, publicly traded stock, restricted and controlled securities, and real estate.

Contribute to a 401(k) or IRA

There are few more tax-advantageous money moves a high-income earner can make than regularly socking away money in a retirement account. The two most popular – and valuable – options are 401(k)s and IRAs, though both can provide unique benefits to a strategy.

With a traditional 401(k), you contribute pre-tax dollars, and the earnings grow tax-deferred. However, distributions are taxable in retirement, so you should weigh the benefit of deferring taxes now against the future burden.

Take Advantage of Health Savings Accounts

Health savings accounts (HSAs) are a tax-advantaged way to save for qualified medical expenses. HSA funds are not taxed and can be withdrawn anytime without incurring federal tax liabilities or penalties.

In 2022, the IRS contribution limit for HSAs was $3,650 for singles and $7,300 for families. For workers over age 55, there is a $1,000 catch-up contribution limit.

Donate to a Charity

Donating to a charity is a great way to reduce your taxable income. And you may even qualify for tax break in the year you donate!

However, it would help if you considered a few things before donating to a charity. First, ensure the charity you’re donating to has a clear mission and programs matching your interests.