Retirement planning and tax planning are intrinsically linked because things you do in one area can directly impact the outcomes in the other. Retirement planning and tax planning are intrinsically linked because things you do in one area can directly impact the outcomes in the other. 

There’s often a push-and-pull between the two—some strategies offer immediate tax benefits today, while others involve stashing away funds for a seemingly distant future. 

As income grows, so does the complexity of managing the tax responsibility today, let alone for a comfortable retirement potentially decades down the line.

As you’re likely familiar with, the more you earn, the more challenging the landscape becomes, introducing unique hurdles from navigating contribution limits on retirement accounts to minimizing tax liabilities on investments and income.

The following article is part of a four-part series of the prime components of a high-earner financial plan. 

Today, we’ll focus on the role of retirement and tax planning and the most pressing issues we encounter as financial planners for high earners, drawing on real-world scenarios faced by those with more complex financial picture.

Retirement isn’t just about kicking back—it’s about making sure your financial future supports the lifestyle you’ve worked hard to build. 

Walk with me through a typical introductory high earner retirement planning conversation: 

Financial Planner: “So, how do you see your life post-retirement?”

Client: “Well, I’d love to travel. Maybe spend most of my days on the beach. I’d love to get back into playing piano.”

Financial Planner: “That’s amazing. What happens after you’re done traveling? Or do you plan on traveling indefinitely? What happens after the beach days? And when you’re at the piano?”

Client: “I’m not sure, I haven’t really thought that far.”

Financial Planner: “That’s completely normal. Most people focus on the first few years of retirement—the fun stuff, right? But life after that might look a little different. The trick is planning for both phases. Let’s think about things like what would happen if health issues slow down those travels, or if you find yourself wanting to stay closer to home. How would you feel about your lifestyle if those plans needed to change?”

Client: “I see what you mean. I guess I’d want to have some stability if travel isn’t as appealing anymore. Maybe I’d take up teaching piano or volunteer locally.”

Financial Planner: “Exactly—that’s where a well-rounded retirement plan comes in. We want to make sure that whether you’re touring Europe, enjoying quiet beach days, or finding a new rhythm back home, your financial plan has you covered. It’s not just about what you’ll do, but how you’ll keep living life fully when those activities shift. Let’s talk about what that could look like in dollars and cents.”

Contrary to how many people may view it, retirement isn’t exactly like a celebratory victory lap after passing the marathon finish line. 

Ultimately, everything has a price tag.

No matter how exuberant or simple your vision for retirement is, you can come up with a fairly ballpark range of what that would cost and what you’d have to do today to make that happen. 

In most cases, taxes will follow you even beyond the end of your mortal coil. However, proper planning today can set you up for minimal to no tax liability upon retirement.

The most fundamental principle for proper high earner retirement planning is tax diversification and balancing contributions between tax-deferred and tax-free accounts, such as Traditional and Roth IRAs or 401(k)s.

⌛Traditional accounts give you a tax break now but will require you to pay taxes on withdrawals in retirement. 

⏳Roth accounts, on the other hand, let you pay taxes upfront, so your retirement withdrawals are tax-free. 

It’s helpful to think of your accounts in three buckets: taxable, tax-deferred, and tax-free. 

Taxable accounts include regular brokerage accounts and savings accounts. Think of your Robinhood. You contribute after-tax dollars, and you’ll owe taxes on dividends, interest, and capital gains along the way. 

While these aren’t ideal for tax savings, they offer flexibility. 

You can access funds anytime without triggering additional taxes (unless you’re selling investments at a gain). 

This can be helpful if you want to minimize your taxable income in retirement by drawing strategically from these accounts.

Tax-deferred accounts like Traditional IRAs and 401(k)s let you contribute pre-tax dollars, reducing your taxable income today. 

The funds grow tax-deferred, allowing for compounding growth without annual tax drag. 

However, retirement withdrawals are taxed as ordinary income, and you’ll need to take required minimum distributions (RMDs) starting at age 73 (as of 2024). This can lead to a hefty tax bill later, but it’s a valuable tool if you expect to be in a lower tax bracket when you retire.

Tax-free accounts such as Roth IRAs and Roth 401(k)s operate in reverse: you pay taxes upfront on your contributions, but the growth and withdrawals in retirement are completely tax-free, as long as you meet the rules. 

This makes Roth accounts incredibly powerful, especially if you anticipate higher tax rates in the future. 

And, unlike traditional accounts, Roth IRAs don’t have RMDs, giving you more flexibility over your retirement income.

By spreading your savings across these different buckets, you gain the ability to adjust where your retirement income comes from based on your tax situation each year. 

For example, if you find yourself bumping up against a higher tax bracket, you can draw more from your Roth IRA that year to keep your overall tax bill down. 

This flexibility helps you manage taxes and extends your portfolio's life by optimizing withdrawals based on how the winds blow in the tax world. 

However, high earners often hit a wall with contribution limits.

In 2024, the contribution limit for 401(k)s is set at $23,000, with an additional $7,500 catch-up for those over 50. The limit for IRAs (Traditional and Roth) is $7,000, with a $1,000 catch-up if you’re over 50. 

These limits can make it difficult to sock away enough in tax-advantaged accounts, especially for those earning well above the threshold.

Roth IRAs have income caps that phase out contributions starting at $153,000 for single filers and $228,000 for married couples filing jointly. 

This is where creative strategies like the Backdoor Roth IRA come into play, allowing high earners to bypass those income restrictions and contribute to a Roth IRA indirectly by converting funds from a traditional IRA.

High Earner Retirement Planning Key Points Summary

Don’t put all your eggs in one tax basket.

Spreading your savings across tax-deferred, tax-free, and taxable accounts allows you to pull from different types of funds in retirement as it best suits you, potentially saving you thousands or more over the course of retirement.

Lastly, don’t assume you’ll be spending significantly less in retirement. Sure, your mortgage might be paid off, but rising healthcare costs, hobbies like travel, and inflation can sneak up on you. Inflation may also wreak havoc on your projected cost of living. 

It’s safer to plan for replacing 100% (or more) of your pre-retirement income. 

And while Medicare may help with medical costs, it won’t cover everything—and let’s be honest, the future of Social Security is anyone’s guess. 

Take the time to run different scenarios, factoring in all those future hobbies you’ve been dreaming about.

Pro Tip: A financial planner can help you run retirement simulations that include healthcare costs, inflation, and potential reductions in (or elimination of) social programs like Social Security to get a clearer picture of how much you’ll actually need to enjoy the retirement you envision.

High Earner Tax Planning

Tax planning is a high-stakes game for those with substantial income.

If you find yourself at the upper tiers of the marginal tax bracket, every additional dollar earned can be taxed at 37% or higher—meaning about a third of what you make is going to the IRS, and possibly more for state and city taxes. 

Without a solid strategy, taxes can take a big bite out of your retirement savings and investment returns. 

Smart tax planning shouldn’t feel like an annual chore; it’s an exhilarating opportunity to reclaim some ground from the taxman. Think of it like watching a great NFL or NBA game—people love a well-timed defensive play that can turn the tide in key moments. Taxes are no different. 

Sure, the posterizing dunks and wild endzone catches make the SportsCenter highlights, but defense makes a great team great. 

In the same way, defense can win championships; a strong tax defense can protect your wealth and keep more of your hard-earned money in play.

To maximize your earnings and avoid rising tax rates, let’s examine a few of the most impactful strategies, starting with the easiest ones and moving on to the more complex but highly beneficial moves.

The lowest hanging fruit is maximizing contributions to tax-advantaged accounts, like 401(k)s and IRAs. Contributions lower your taxable income now, and the investments grow tax-deferred until you start withdrawing in retirement.

We just talked about retirement accounts, and although there’s much more to discuss, let’s cover as much ground as possible. 

Beyond the 401(k), Health Savings Accounts (HSAs) are another underutilized tool for high earner tax planning. If you have a high-deductible health plan, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage. These contributions are tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses—even in retirement.

Next is automating tax-loss harvesting. 

Selling losing investments to offset capital gains can reduce your overall tax bill, but be mindful of the tradeoffs (like resetting your cost basis) and fine print (the wash sale rule.)

Some robo-advisors offer automated tax-loss harvesting, but it’s worth considering even if you manage your investments manually. Remember, you can carry forward any unused losses to future years to offset gains or up to $3,000 of ordinary income annually.

Taxes can also inform your investment selection. 

Tax-efficient funds, like index funds or ETFs, are inherently better tax-wise than actively managed mutual funds, which generate more taxable events through frequent buying and selling. 

Choosing the right investment vehicles can minimize capital gains taxes year after year without requiring much ongoing effort.

For most high earners, the decision to itemize may be more beneficial than a standard deduction. 

While the 2024 standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly, itemizing allows you to deduct specific expenses that exceed these thresholds, potentially lowering your tax bill even further.

Common itemized deductions include state and local taxes (SALT) up to $10,000, mortgage interest, charitable contributions, medical expenses that exceed 7.5% of your adjusted gross income, and certain investment-related expenses. If your qualifying expenses surpass the standard deduction, itemizing can lead to significant tax savings.

High Earner Tax Planning Key Points Summary

Waiting too long to actively manage your tax strategy could cost you. With the looming expiration of the TCJA, tax rates are likely to rise. 

The top income tax rate is set to jump from 37% back to 39.6%, and other brackets will increase as well. If your investments and retirement accounts aren’t structured properly, you could face hefty tax bills when you need the money most.

You need to stay ahead of tax implications beyond just rising rates. Consider how Medicare surcharges and the Net Investment Income Tax (NIIT)—an additional 3.8% tax on investment income for those earning over $200,000 (single) or $250,000 (married)—can quietly erode your wealth.

Making Sense of High Earner Retirement and Tax Planning

Retirement planning and tax planning are inseparable, especially for high earners. Both aspects directly influence the size and sustainability of your retirement nest egg. 

For high-income professionals, saving for the future is not just about minimizing taxes along the way and during the distribution phase. Crafting a retirement plan without considering the tax implications can mean leaving money on the table. 

Retirement and tax planning are the meat and potatoes of your overall financial plan. 

Next, we’ll explore risk management and estate planning, two critical areas that ensure your wealth is preserved and passed on as intended.