Investment Strategies for High-Income Earners

Jul 21, 2024

Investment Strategies for High-Income Earners

1. Emergency Fund (Cash)

  • Essential to maintain a good amount of liquid cash.
  • Acts as a safety net for unexpected expenses (e.g., medical emergencies, car repairs).
  • Prioritize liquidity over high-interest returns (avoid penalties from CDs).
  • Recommended to have 3-12 months of expenses in cash depending on risk tolerance.

2. 401(k) Employer Match

  • Contribute to 401(k) up to the employer match for free money.
  • Example: $100,000 salary; 4% match adds $4,000 to your 401(k) when you contribute $4,000.
  • Reduces taxable income.

3. Employee Stock Purchase Plan (ESPP)

  • Company-run program allowing purchase of company stock at a discount (usually 15%).
  • Contributions made via payroll deductions.
  • Sell shares immediately to secure 15% discount.
  • Reinvest proceeds into broad market index funds.

4. Pay Down High-Interest Debt

  • Target debts like credit cards, auto loans, and student loans.
  • Use methods like debt snowball or avalanche to tackle debts efficiently.

5. Max Out 401(k) Contributions

  • Benefit from tax deductions on contributions during peak earning years.
  • Contribution limits (2024): $23,000 (under age 50), $30,500 (age 50+).

6. Health Savings Account (HSA)

  • Contribute to HSA for triple tax benefits (contributions, growth, withdrawals are tax-free for medical expenses).
  • No expiration for using HSA funds.
  • Contribution limits (2024): $4,150 (self-only), $8,300 (family).

7. Backdoor Roth IRA

  • For high-income earners ineligible for direct Roth IRA contributions.
  • Use non-deductible contributions to traditional IRA, then convert to Roth IRA.
  • Pay taxes on conversion but future growth and withdrawals are tax-free.

8. Mega Backdoor Roth IRA

  • Strategy to contribute after-tax dollars to 401(k) and roll into a Roth IRA.
  • Conditions: 401(k) plan allows after-tax contributions, ineligible for regular Roth IRA, maxed out traditional 401(k) contributions.

9. 529 Education Savings Plan

  • Save for educational expenses with tax advantages.
  • Contributions grow tax-free when used for qualified education expenses.
  • No annual contribution limits but subject to gift tax exclusion.

10. Taxable Brokerage Account

  • Invest in broad market index funds after maxing out tax-advantaged accounts.
  • Use as a tool to bridge the gap between regular and early retirement.

11. Real Estate Investments

  • Diversify income by investing in rental properties or REITs.
  • REITs offer real estate exposure without the hassle of managing properties.
  • Consider Vanguard Real Estate Index Fund (VGSLX) or REIT ETF (VNQ).

12. Pay Down Low-Interest Debt

  • Consider paying off home mortgages or other debts with <3-5% interest rates for peace of mind.
  • Weigh the psychological benefits against potentially higher returns from investments.

For a quick visual guide, download the companion PDF from the description link.