When you earn more, you may pay more in taxes. One of the main benefits of retirement accounts is the potential to save on taxes through tax-deferral now or the potential for tax-free distributions in the future. But there are often limits on these accounts for higher-income earners. Here are some tax-efficient investment strategies to consider:
- Maximize your 401(k). With a 401(k), you can typically contribute either the lesser of your income or the contribution limit, currently $26,000 if you’re 50 or older, for both pretax 401(k) and Roth 401(k)s. Making pretax contributions reduces your taxable income, and your earnings grow tax deferred. Roth 401(k) contributions are made after taxes but provide the potential for tax-free distributions in retirement. Depending on your employer's plan, you may also be able to contribute additional after-tax contributions, so talk to your plan administrator about your options.
- Roth IRA strategies. You cannot contribute to a Roth IRA if you have modified adjusted gross income (MAGI) of $140,000 or more if filing single ($208,000 or more if married filing joint). However, there are strategies you could discuss with your tax professional, such as a backdoor Roth IRA conversion. This strategy allows you to make an after-tax contribution to a traditional IRA or 401(k) and then convert it to a Roth. This can be complex, but if you expect your tax rate to be higher when you retire and you cannot contribute to a Roth due to your income, this could be a strategy to consider.
- Consider annuities. If you have maxed out your other retirement savings options, some annuities could provide another avenue for tax-deferred growth. Your earnings typically won’t be taxed as income until you start taking payments. Withdrawals taken prior to age 59½ may be subject to a 10% federal tax penalty. Surrender penalties are usually assessed if you withdraw all or a portion of your principal during the guarantee period. Such withdrawals may also be subject to a market value adjustment.
Other tax-efficient investment strategies you could discuss with your financial advisor and tax professional could include individual stocks, tax-efficient mutual funds and municipal bonds.
Edward Jones is a licensed insurance producer in all states and Washington, D.C., through Edward D. Jones & Co., L.P., and in California, New Mexico and Massachusetts through Edward Jones Insurance Agency of California, L.L.C.; Edward Jones Insurance Agency of New Mexico, L.L.C.; and Edward Jones Insurance Agency of Massachusetts, L.L.C.
Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.