An overview of high-income retirement funds
If you are a high-income earning individual, saving for your retirement may be more challenging than you think, and you might find yourself in a unique situation if you are a high-income earner. You max out your contribution through common and normal channels like an individual retirement account (IRA) or a 401(k) before reaching the 15% mark, which is the amount you require to invest each month in order to ensure a solid and a stable financial future. Understanding the best retirement options is essential to have a laidback and peaceful retirement.
Below is some information that can help you as a high-income earner to save for your retirement.
What is the traditional IRA?
- The traditional or individual retirement account allows you to save and invest all the pre-tax income.
- You will not need to pay taxes on your contributions and earnings until withdrawals begin. Except in those instances when contribution allowance is disallowed by the IRA.
- Like most saving plans, if you withdraw before you are 59 and a half you would likely incur a penalty.
- You may be able to deduct your contributions from your taxable income depending on your involvement in other retirement plan and adjusted gross income.
What is a Roth IRA?
- Roth IRA requires that the contribution should be made after paying the taxes.
- They are never tax deductible. However, potential earnings grow tax-free.
- Withdrawals can be taken as early as age 59 and a half and are also tax-free, subject to certain conditions that are beneficial to a higher tax bracket.
- This can be beneficial if you expect to be in a higher tax bracket in your retirement.
What are the similarities between a traditional IRA and a Roth IRA?
- Both traditional IRA and Roth IRA contribute to the minor and non-working spouses as long as they meet certain income rules.
- The deadlines for the both traditional IRA and Roth IRA is April 1 and under most circumstances as long as you have earned income, the amount that you can contribute each year is $5500 if you are under the age of 50 and $6500 if over the age of 50.
- The earned income is mostly in the form of wages, salaries, and tips in most cases.
- However, in the case of union strike benefits, long-term disability benefits, and self-employment income it can also be considered as earned income by both the IRAs.
- Interests and dividends, social security, alimony, or child support are not considered to be an earned income.
What is a defined contribution plan?
- The defined contribution plan is the plan to which you or in some cases your employer contribute to the no-guarantee payout at retirement.
- One popular defined contribution is the employer-sponsored 401K, which is funded with the pre-tax amount deducted from your gross salary.
- Some employers may match up to the employee contribution to a specified percentage.
- A 401K can help you save money for your retirement and invest it for your further growth.
- You are not required to pay any income tax on your contributions or earnings until you start taking disbursements.
- You can start as early as you are at the age of 59 and a half. In addition to your regular salary and bonuses, your employer may offer you a profit-sharing plan.
- This supplementary pay is based on the percentage of company earnings and your level of compensation. Well, not a retirement account would per se, may be given to you in the form of additional retirement plan contribution.
- These contributions are not guaranteed and may be omitted in low profiting years.
- Not all employers offer retirement saving plans while some may offer more than one, and each plan has different participation rules and contribution limits.
- The type of company you work for or own, how much you earn and your spouse’s retirement plan are some additional factors in contribution rules and that’s why it is important to do some research and receive some guidance from trusted investment professionals and your tax advisor.
What is a defined benefit pension?
- In past, many jobs came with a defined benefit pension, meaning guaranteed retirement income for a specific period of time.
- Enhancing them to put a strain in many corporations but few still offer them.
- Today, the classic pension has generally been replaced by defined contribution plans.