If You Make More Than $150K, Having a 401(k) Isn’t Enough — Here’s Why
Written by
Gabrielle Olya
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Laura Bogart
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If you have access to a 401(k) plan, you should certainly be taking advantage of it to build up your retirement nest egg. However, you may reach a point when you will want to consider other vehicles for long-term savings.
According to a new study by Principal Financial Group, that tipping point seems to be an annual household income of $150,000. Americans who have reached this threshold are more likely to add an IRA to their retirement strategy than those who earn less.
Here’s why you should look beyond your 401(k) if you make $150,000 or more.
A 401(k) Plan Might Not Be Enough
Ideally, your retirement strategy will include multiple accounts outside of your workplace retirement account.
“Regardless of income level, many Americans tend to underestimate the financial resources required to maintain their lifestyle and manage expenses once they transition from earning a paycheck to living off their retirement savings,” said Heather Winston, assistant vice president of individual retirement solutions at Principal.
“While retirement plan accounts like 401(k) [plans] often represent one of the largest assets in a household, relying solely on a 401(k) may not adequately fulfill long-term savings needs and aspirations,” she continued. “By diversifying their investment strategies, workers can enhance their financial flexibility, optimize tax efficiency and better align their savings with their retirement goals.”
The first step in creating a robust retirement plan should be calculating how much you will realistically need, and then figuring out the tools you can use to get there.
“By utilizing financial wellness programs and tools, and engaging with financial professionals, individuals can prioritize their savings goals and identify the most suitable accounts for their circumstances,” Winston said. “This is why I advocate for a comprehensive savings approach — individuals should strive to save as much as possible, through a variety of methods, for as long as possible.
“There are numerous savings options and products available,” she continued. “Akin to navigating to an unfamiliar destination, having a clear vision of one’s goals and developing a structured plan can significantly aid in achieving financial security.”
Why High Income Earners Should Contribute To an IRA in Addition to a 401(k)
There are several reasons that having both an IRA and 401(k) is beneficial for those earning $150,000 and above. For starters, the accounts have different contribution limits and tax benefits.
“High earners may reach the 401(k) annual contribution limits quickly,” Winston said. “Excess income saved within IRAs, and even health savings accounts, can help adhere to saving as much as possible.”
Another benefit to adding an IRA to your retirement savings plan is that it provides more choice for your investments.
“401(k) plans often have limited investment options,” Winston said. “By investing in other accounts, like IRAs, individuals have access to a wider array of investment options and can improve their overall investment diversification.”
Having more than one account also provides greater financial security.
“Relying solely on a 401(k) may not provide sufficient funds for retirement, particularly as living expenses and healthcare costs rise,” Winston said. “Supplementing retirement savings with an IRA can help ensure a more comfortable and secure retirement.”
Other Accounts To Consider
In addition to 401(k) plans and IRAs, high-income earners should look into other types of accounts to create healthy nest eggs.
“By utilizing HSAs, Roth accounts, taxable brokerage accounts, real estate and 529 plans, individuals can optimize their investment portfolios, enhance tax efficiency and better align their financial strategies with their long-term goals,” Winston said.
Health savings accounts (HSAs) provide triple tax benefits.
“HSA contributions are tax-deductible, earnings grow tax-free and withdrawals for qualified medical expenses are tax and penalty-free,” Winston said. “This makes HSAs an effective tool for both current healthcare costs and future medical expenses in retirement.”
HSAs can be especially useful for those with a household income of $150,000 or more.
“Many individuals view HSAs merely as transactional accounts; however, those with higher incomes should consider using HSAs as long-term investment vehicles,” Winston said. “Funds can be invested in various assets, allowing for potential growth over time, similar to a retirement account.
“They also offer even more flexibility once individuals reach age 65,” she continued. “Withdrawals can be made for any purpose without incurring penalties, although they will be subject to ordinary income tax if used for nonmedical expenses. This feature can further enhance retirement planning and cash flow management.”
Roth IRAs and Roth 401(k) plans are funded with after-tax dollars, allowing for tax-free withdrawals in retirement.
“This is particularly advantageous for high-income earners who may face higher tax rates in the future,” Winston said. “There are income limits for direct Roth IRA contributions. However, the ‘backdoor Roth IRA’ strategy allows individuals over the income threshold to convert traditional IRA funds into a Roth, thereby taking advantage of its tax benefits.”
Taxable brokerage accounts allow for a wide range of investments, including stocks, bonds and mutual funds. This is a great way to diversify your retirement funds.
“There are no contribution limits, making them ideal for high-income earners looking to invest beyond tax-advantaged accounts,” Winston said. “Investors can strategically manage capital gains and losses to optimize their tax situation, providing greater control over their taxable income.”
Real estate can provide a steady income stream and potential appreciation in value.
“It offers diversification away from traditional stock and bond markets, which can be especially beneficial for high-income earners,” Winston said. “Additionally, real estate investors can take advantage of various tax deductions, such as mortgage interest, property taxes and depreciation, enhancing overall tax efficiency.”
College savings plans are beneficial for those with children to save for future education expenses.
“Contributions [to 529 plans] grow tax-free, and withdrawals for qualified education expenses are also tax-free,” Winston said. “High earners can take advantage of gifting strategies through 529 plans, potentially reducing their taxable estate while helping to fund their children’s education.”
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