Congratulation! You are making more money than ever before and your personal finances are doing well. You ticked all the âfinancial basesâ boxes, maybe even more:
So what’s next?
When you do all the right things, give yourself credit. Next, consider these five advanced ways to take your financial plan to the next level so you can continue to make progress towards your goals.
1. Roth IRA backdoor conversion
Are you earning too much to contribute to a Roth IRA? If you earn more than $ 140,000 (single filer) or $ 208,000 (joint filer) in 2021, the IRS says you are no longer eligible to contribute to a Roth IRA.
But, you are in luck. There is an IRS approved high income workaround called Roth IRA backdoor conversion.
This is how it works: You open both Traditional and Roth IRAs at the same time. You can contribute non-deductible dollars of up to $ 6,000 for 2021 ($ 7,000 if you’re 50 or older) to your traditional IRA, and immediately convert those dollars into your newly opened Roth IRA.
Each year, usually at tax time, you can repeat this process to continue building the tax-free compartment of your overall retirement portfolio.
2. Contribution 401 (k) after tax
If you are already maximizing your business’ 401 (k) plan, you are setting yourself up to afford what you want and need as you approach retirement. Some employers even give you the option of contributing even more than the $ 19,000 (2021) limit with 401 (k) after-tax contributions.
It’s a great way for top earners to put even more money into a tax-efficient investment account.
This is how it works: First, check with your employer to see if they allow this type of 401 (k) contribution. If they do, and you’re already maxing out $ 19,500 for the year, you may be eligible to contribute an additional $ 38,500 ($ 45,000 if you’re 50 or older) in non-deductible dollars. By the way, this total includes any employer correspondence you already get.
There are potential tax implications, so be sure to check with your accountant or financial advisor before making this decision.
Either way, this is a huge win for anyone looking to maximize their tax-efficient retirement money.
3. Roth mega backdoor conversion
So far we’ve covered Roth backdoor conversions and 401 (k) after-tax contributions. A backdoor Roth mega-conversion occurs when you combine the two, which is ideal if you want maximum flexibility and tax-free growth with your retirement money over the long term.
And don’t we all want that?
This is how it works: Employees who are eligible to make after-tax 401 (k) contributions can immediately convert that non-deductible portion of their 401 (k) to a Roth IRA or Roth 401 (k), depending on the specific rules of your employer’s plan.
A word of caution: Roth mega backdoor conversions can include a lot of moving parts. To avoid surprise tax bills and make sure it’s done correctly, seek help from a qualified financial professional.
4. Charitable investment accounts
Would you like to support charitable causes throughout your life? Maybe you care about mental health, donating to the local hospital, or supporting your church. What if you received a big initial tax deduction for your charitable purposes?
This is the benefit of a donor advised fund, AKA a charitable investment account.
This is how it works: Opening a donor advised fund is as easy as opening a brokerage account. You can donate cash, valued stocks, even the minimum required distributions, and receive a tax deduction for your contribution the same year you made it.
Year over year, the money in your donor advised fund grows with the investments you choose, and you are able to gradually withdraw that money and donate to charities over the course of your life. .
This is a popular strategy for high-income techs and startups who have enjoyed stocks and want to minimize their tax impact while supporting causes they care about.
5. Mid-year tax strategy with a CPA
Tired of surprise tax bills? When your financial life gets more complex (eg, more investments, higher income, stock compensation, running a business), it’s probably time to hire a CPA.
And not just to “do” your taxes.
This is how it works: One of the most valuable investments you can make is having a strategic mid-year call with a CPA you trust. During these mid-year tax planning calls, a CPA will help you proactively envision the years ahead and make financial adjustments as your tax situation evolves.
If you got paid in equity, own a business, recently got married, or bought a home, a mid-year tax planning call is one of the first recommendations I make to new wealth management clients. .
It really is obvious.