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5 Effective Ways High Income Earners Can Invest Their Income

high income earners

According to data from the Social Security office, those in the top 5% earn an average of $299,810.

Are you in that top 5% of income earners in America?

Have you maxed out your contributions putting money into your 401(k) or an IRA?

If you are among the high income earners, you need to find the best ways to handle your money. Check out these 5 effective ways to invest your money.

Smart Investment Ideas for High Income Earners

Your high income does not have to be an obstacle to your choices for a tax-efficient retirement savings plan.

1. Fixed-Income Funds

If you are looking for a safe way to get a return on your investment, fixed-income funds such as bonds and securities, are a good choice.

There is little risk and limited loss if the market is down. Fixed-income funds don’t offer great gains, but they get a greater return on your investment than a savings or money market account.

2. Backdoor Roth IRA

The income limits for 2018 for opening or contributing to an IRA:

  • Adjusted gross income of $135,000 for individuals
  • Adjusted gross income of $199,000 for couples

*Adjusted gross income is gross income minus specific deductions.

Roth IRAs are a great investment because any growth and later withdrawals are tax-free.

A backdoor Roth IRA is the legal way around the income limit rule. No matter your income, you can convert from a traditional IRA to a Roth IRA.

When you do this conversion, you will pay taxes on that initial investment, but not on the growth or withdrawals. You can repeat this process year after year. Your money will grow tax-free.

3. After-Tax 401(k) Contributions

Check with your employer regarding contributing to your 401(k) plan after taxes.

You are allowed to contribute up to $18,000 of pre-tax income ($24,000 if you are over age 50).

If your employer allows after-tax contributions, your total (pre-tax and after-tax) maximum contribution can be $55,000 or $59,000 for those over age 50.

One negative of this plan is that only the first $18,000 in contributions is tax deductible.

4. High-Interest Savings Account

A high-interest or high-yield savings account pays a significantly higher interest rate than a traditional savings account.

The money is insured by the FDIC or the NCUA depending on whether you use a bank or a credit union.

When considering a high-interest savings account, it is important to ask what is the minimum initial deposit, what is the interest rate and is it permanent or introductory, and do you need to keep a minimum balance.

5. Taxable Investment Account

After you have contributed the max pre-tax money to your 401(k), your IRA, etc., you should consider opening a taxable investment account.

There are no limits to the amount you can contribute because you have already paid taxes on the income. You can withdraw money any time without penalty. This option has no tax breaks, however.

What’s The Best Way to Invest?

If you are one of America’s high income earners, you’ll want to discuss any of these investment options with a licensed professional to see what will work best for you and your individual situation. Contact us for more information regarding the savings plans we offer as a financial institution.