High-income earners can use tax strategies to save for retirement
There are several tax tactics for high-income earners who want to save for retirement. These choices can help you save money on taxes and lower the amount you must pay.
First, think about putting money into the retirement plan your company offers. This can lower your taxable income and make it possible to take money out of your account tax-free when you leave.
Put money in an account that doesn’t charge taxes
High-income people should consider putting money into tax-free savings accounts like a TFSA, RRSP, or HSA. These can be used for many long-term goals, like saving for retirement, college, or medical costs.
There is a series of tax-advantaged investment accounts, from an HSA with triple tax advantages to a taxable brokerage account with no special tax advantages. By using this system, people with high incomes can save the most for retirement and pay the least taxes.
Move to a state with no income tax
Moving to a state that doesn’t have an income tax is a popular way for high-income retirees to save money on taxes. But if you’re considering moving to a state with no income tax, you need to consider how your general state tax burden will affect your finances.
States that don’t have income taxes usually get money from their governments from other places. Some of these are sales, land, and gas taxes.
Give to a good cause
High-income people can easily lower their tax bills by giving to charity. It also helps to give money to projects that you care about.
The first step is to find organizations whose work you agree with. Charity Navigator and other online tools can help you find these groups.
Make a company or an LLC
By making a company or an LLC, you can lower your taxes or put off getting money for a year. For example, if your company gives you a big bonus at the end of the year and your net taxable income is high, you can put the bonus payment off until the next year to lower your overall tax rate.
Both corporations and limited liability companies (LLCs) protect their owners from liability, but the right business form for you will depend on your needs. Think about how you want to run your business, pay taxes, and bring in outside money when choosing which entity to choose.
Give money to a family foundation that is not public
Many people with a lot of money find that a private family foundation is the best way to give money to charity. It can help you save money on taxes and give more to charity than in other ways.
The IRS makes a private family charity tax-free by making it a separate legal entity. It can be paid for by cash gifts, publicly traded stocks, limited and control securities, and real estate.
Put money into a 401(k) or an IRA
Putting money in a retirement account daily is one of the best things a person with a high income can do with their money. 401(k)s and IRAs are two of the most popular and valuable choices, but each has advantages.
In a traditional 401(k), you put money before taxes, and the gains grow without tax. But withdrawals are taxed when you leave, so you should weigh the benefit of putting off taxes now against the cost you’ll have to pay later.
Use a health savings account (HSA)
Health savings accounts (HSAs) are a tax-advantaged way to save money for qualified medical costs. The money in an HSA is not taxed; you can take it out at any time without paying taxes or fines to the federal government.
In 2022, the IRS will let single people put up to $3,650 and couples up to $7,300 into their HSAs. There is a $1,000 catch-up contribution cap for people over age 55.
Give to a good cause
Giving to charity is a great way to lower the money you have to pay taxes on. And you might even get a tax break in the year you give.
But before you give money to a charity, there are a few things you should think about. First, ensure the charity you’re giving to has a clear goal and programs matching your interests.