If you're a high income earner, it's always worth finding out the best way to navigate high tax rates you may face. Here, we discuss a few key tax strategies for high income earners.
Contributing to an IRA or 401(k) are excellent ways to save and grow your income for retirement. However, there are some key ways to optimize funding your retirement account while minimizing taxes down the road.
When you do a Roth IRA conversion, you transfer your retirement funds out of a traditional-type 401(k) or IRA account and into a Roth account. While you'll need to pay taxes on the money you convert in the year you convert it, you won't need to pay taxes on withdrawals you make from a Roth account in the future.
By paying taxes now at what may be lower rates you can start building more tax-free wealth down the road. And, with the Tax Cuts and Jobs Acts, you can take advantage of lower tax rates until 2025 when you do a Roth conversion.
It is common for people to contribute to a Traditional 401(k) by making deferrals from their paycheck to a retirement plan sponsored by their employer. Doing this can lower their current taxable income through pre-tax and may benefit them down the road if tax rates are lower when they withdraw from their retirement account. However, it's worth considering the benefits of contributing to a Roth 401(k) if you are a high income earner.
With a Roth 401(k), there are a few key benefits to consider. First, there is no income-limit eligibility and the contribution limit is $20,500. Also, since you pay taxes when contributing to a Roth 401(k), you will be able to withdraw funds and the earnings you gain tax-free during retirement.
Ultimately, deferring to a Roth 401(k) can be an excellent opportunity to grow tax-free income which you can tap into down the road, especially if you are in a higher tax bracket than you expected to be in during retirement.
When it comes to tax strategies for high income earners, it's always worth considering how donations can offer tax saving opportunities. For some, a donor-advised fund is a great way to minimize taxes while creating a legacy of giving.
A donor-advised fund may be a good option for you if you've had an especially high-income year. By using a donor-advised fund, you can spread grants out while also allowing money in the fund to grow over time. This type of fund is a 501c(3) and is allowed to grow tax-free for the purpose of transformational giving. In essence, a donor-advised fund can be an excellent way for your family to continually give and involve the next generation with giving.
At Finley Davis, we are familiar with the best tax strategies for high income earners and can consult you on the optimal path forward. To get started, send us a message or call us today.