Tax Focused Investment Strategies for High Earners: How to Keep More of Your Savings for Retirement

Tax Focused Investment Strategies for High Earners: How to Keep More of Your Savings for Retirement

May 11, 2022

As a high-income earner, it's vital to have a comprehensive understanding of the tax laws that apply to you. The more taxable income you have, the higher your federal income tax bill. Fortunately, there are a number of tax reduction strategies available to high earners, and in this blog post, we will discuss some of the most effective ones. Keep in mind that everyone's situation is different, so be sure to consult with a professional tax advisor before making any decisions. We recommend a fiducially licensed CPA, CFP®, or RICP®.

Why you need to be proactive about taxable income for your retirement accounts.

In retirement, you'll most likely be in a lower tax bracket than you are now. So if you're proactive about taxable income now, you can save yourself a lot of money down the road. It pays to be aware of the tax implications of your retirement savings choices. 

High net worth individuals face a unique set of challenges when making and managing their money effectively. On the one hand, they have greater financial resources at their disposal, so they can more easily achieve their investment goals. However, on the other hand, high-income earners must be particularly careful, as their exceptional wealth will generate high taxes, which can chip away at retirement savings.


Income tax liability and capital gains 

It's important to remember that your income tax liability is not static. As your income level changes, so too does your marginal tax rate, which can impact the amount of taxes you owe on investment gains. For example, if you are in the highest tax bracket, you will owe taxes on capital gains at a rate of 20%. However, if your income falls into a lower tax bracket, the rate on capital gains may be as low as 0%. This is one reason why it's so important to work with a professional tax advisor to ensure that you are taking advantage of all the available opportunities for tax advantages.


What are the federal income tax reduction strategies available to high-income earners?

As someone earning a high income, you have various options available to help you optimize your tax efficiency. One of the best ways to reduce your tax liability is to invest in assets that generate little or no taxable income. For example, although your contributions are after-tax dollars, a Roth IRA can be a great way to keep more of your savings for retirement because these accounts grow tax-free. Withdrawals are also generally tax-free (which can be a significant advantage during retirement).

Another strategy for high-income earners is to use tax-deferred accounts such as traditional IRAs and 401(k)s. By deferring taxes on the money you contribute to these accounts, you can minimize your taxable income and reduce your overall tax liability in the present. However, withdrawal of funds from these accounts is subject to income taxes in retirement, so consider the long-term impact of this strategy before making any decisions. Still, it can be a good way to reduce your tax bill in the short term and make significant progress towards your retirement savings goals.

Consider a Backdoor Roth IRA

A backdoor Roth IRA is a way for high-income earners to avoid the income limitations on traditional Roth IRA contributions. The limits in 2021-2022 for a Roth IRA are $6000 for an individual (or $7,000 if you're age 50) and up to the maximum for each spouse for a couple filing jointly.   For most people, this isn't a problem. But if your income is too high, you may not be able to contribute to a Roth IRA at all. The backdoor Roth IRA allows you to get around this problem by contributing a non-deductible amount to a traditional IRA – and then converting it to a Roth IRA.

The backdoor Roth IRA is named after the fact that it takes advantage of a "backdoor" in the tax code. The tax code says that you can't contribute to a Roth IRA if your income is above a certain level. But it doesn't say anything about converting a non-deductible amount in a traditional IRA to a Roth IRA. So, if you contribute to a traditional IRA and then convert it to a Roth IRA, you can get around the income limitations.

There are a few things to keep in mind when using the Backdoor Roth IRA. First, you will need to open a traditional IRA and ensure it is not subject to the early withdrawal penalties. Second, you will need to make sure that you contribute enough money to the traditional IRA to cover the conversion. Finally, you will need to pay taxes on the conversion at your marginal tax rate. However, the Backdoor Roth IRA can be an excellent way for high-income earners to save if they are otherwise ineligible to contribute to a Roth IRA directly.

Tax-efficient investing in mutual funds, index funds, and exchange-traded funds (ETFs)

If you are in a high tax bracket, you might consider investing in tax-efficient mutual funds. These funds are designed to minimize the amount of taxable income they generate. An alternative is to invest in index funds, which offer greater tax efficiency than actively managed funds. Or you could invest in ETFs, which tend to be even more tax-efficient than mutual funds.

Finally, if you are a high earner, you may also be able to benefit from investing in a taxable brokerage account. In general, mutual funds and other investments are subject to capital gains taxes when they are sold. However, there are some strategies that high earners can use to minimize their tax liability:


Tax-loss harvesting is a strategy that can help investors minimize their tax liability and improve the performance of their investment portfolios. This involves selling an investment that has fallen in value to generate a tax-deductible loss for the current year. 

By using this kind of strategy, investors can offset other gains with losses, reducing their taxable income. Furthermore, by selling underperforming investments, they are able to redeploy those assets towards more profitable opportunities, which helps to improve overall returns. 

To prevent an investor from deducting a capital loss if they buy the same or similar security within 30 days of the sale, tax-loss harvesting is subject to the IRS's Wash-Sale Rule.

Although there are some risks involved with tax-loss harvesting, it is an essential technique that all investors should consider if they want to maximize their returns and minimize their tax burden.


If you're strategic about it, you can use gift-giving to help minimize your estate tax liability and transfer wealth to future generations in a tax-efficient manner. The gift tax exemption currently allows you to give up to $16,000 per year ($32,000 for a married couple) to as many people as you like without paying any tax (provided you don't exceed a lifetime limit of $12.06 million).

One way to take advantage of the exemption is to make a gift to a family member, friend, or charity in a year when your income is especially high. For example, if you are in the top tax bracket and expect to be in a lower bracket in future tax years, you may want to consider making a gift in the current year. By doing so, you can reduce your taxable estate and potentially save thousands of dollars in taxes. 

Another strategy for high earners is to gift appreciated assets, such as shares of stock or mutual funds. When you sell appreciated assets, you are subject to capital gains taxes on their increase in value. However, when you gift appreciated assets that you have held for at least a year, the recipient inherits the asset at its current market value. So it may not be subject to capital gains taxes if they decide to sell it later on.