Tax Planning Tips for High Earners Not Rich Yet
If you are a high earner not rich yet (HENRY), you probably make decent money but not enough to live solely off passive income or create generational wealth. This HENRY phase of your life comes with specific financial issues. High income automatically puts you into a higher tax bracket, and if you don’t do some planning, you could forfeit a lot of your income to the IRS.
Here are a few tax planning tips for HENRYs to help create wealth and save money.
1. Build Your Retirement Accounts
You might lower your taxable income significantly by investing in a retirement account, such as a 401(k) or an IRA. If you are a high-earner, your income helps you make the highest allowed contributions to these tax-deferred accounts.1
401(k)
You have a maximum 401(k) contribution in 2024 of $23,000 if you're under 50 and $30,500 if you're over 50 (thanks to catch-up contributions). This money comes from your pay before taxes to lower your current tax bill. If your employer offers matching funds for your 401(k) plan, that is free money for you. This program encourages you to contribute the amount necessary to get the most matching funds you may receive.
IRA or Roth IRA
Depending on your income and filing status, you may contribute to a traditional investment retirement account (IRA) or a Roth IRA. You are allowed to take a tax deduction for your contributions to a traditional IRA--up to $7,000 in 2024 if you are under 50, depending on your Modified Adjusted Gross Income (MAGI)--and have potential tax-free growth in a Roth IRA (since the contributions are not tax-deductible).2
SEP IRA or Solo 401(k) for the Self-Employed
If you have a side hustle or are self-employed, get a SEP IRA or Solo 401(k). They have higher contribution limits, with the Solo 401(k) allowing up to $66,000 in 2024, based on your income. The more you contribute, the less tax you pay today and the more you benefit in the future.
2. Leverage Health Savings Accounts
A health savings account (HSA) creates a potential tax break3 if you have a high-deductible health plan (HDHP). The money you put in an HSA is tax-deductible, and increases in the account are tax-free. Then, when you use the money for qualified medical expenses, it’s also non-taxable.
An HSA contribution limit is $4,150 for individuals and $8,300 for families in 2024. You may add an extra $1,000 as a catch-up if you’re over 55. HSAs might seem like a good idea for today’s medical costs, but the true tax advantage comes when you save the money and use it as a qualified retirement plan.
3. Explore Tax-Deferred Growth Options
You might aim to accumulate as much money as possible while paying the least amount of taxes. Tax-advantaged investment accounts let you invest your funds in a way that defers or eliminates taxes on gains.
4. Consider Tax-Efficient Investment Strategies
If you’re not fully funding your retirement accounts, you might want to consider tax-efficient investing strategies in your brokerage accounts. While these strategies don’t provide the immediate tax breaks that retirement accounts do, they help manage the taxes you pay on your investment income.
Capital Gains Tax Planning
Long-term capital gains (gains on assets held for more than a year) create less taxes than ordinary income. By holding investments for over a year, you may benefit from lower tax rates on gains depending on your income level).
Tax-Loss Harvesting
This strategy involves selling losing investments to offset gains in other parts of your portfolio, reducing your taxable income. While this strategy is time-consuming to implement, it’s one way to manage the tax impact of a portfolio with appreciated value.
Remember, the goal is more than just managing taxes. You want to work with a financial plan for future success. The earlier you start tax planning for your retirement accounts, the more effective compounding might be for your wealth.
Transform Your Money-Fears into Money-Loves!
Unlock your patterns, gain clarity and focus, and become supremely confident with money using my simple 8-step approach to changing your financial future.
Transform Your Money-Fears into Money-Loves!
Unlock your patterns, gain clarity and focus, and become supremely confident with money using my simple 8-step approach to changing your financial future.
