Investment Strategies for High-Income Earners

1. Maintain a Cash Reserve

• Importance of having a good amount of liquid cash for emergencies.
• Prioritize liquidity over interest rates (e.g., avoid high-penalty CDs).
• Suggested cash reserve: 3-12 months of expenses, based on risk tolerance and recurring expenses.

2. Invest in 401(k) Up to Employer Match

• Employer match is essentially free money (e.g., 100% return on contributions up to the match).
• Reduces taxable income, lowering taxes owed.
• Immediate action recommended if not already contributing up to the match.

3. Employee Stock Purchase Plan (ESPP)

• Purchase company stock at a discounted price, typically 15%.
• Contributions through payroll deductions.
• Benefits: immediate 15% discount equivalent to free money, reinvest the proceeds into a broad market index fund to diversify.
• Available only if offered by your employer.

4. Pay Down High-Interest Debt

• Debt categories: auto loans, student loans, credit card debt.
• High interest debt makes others rich; should tackle it aggressively.
• Suggested methods: debt snowball or avalanche method (personal preference).

5. Max Out 401(k)

• Tax-deferred growth and tax savings during peak earning years.
• Contribution limits for 2024: $23,000 (under 50 years old) and $30,500 (50+ years old).

6. Max Out HSA (Health Savings Account)

• Opt for a high deductible health plan (HDHP) if eligible.
• Triple tax benefit of HSA: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
• Contribution limits for 2024: $4,150 (self-only) and $8,300 (family plans).

7. Backdoor Roth IRA

• For high-income earners not eligible for direct Roth IRA contributions.
• Steps: Make a non-deductible contribution to a traditional IRA, then convert it to a Roth IRA (tax event).
• Requires following specific steps for compliance.

8. Mega Backdoor Roth IRA

• Contribute after-tax dollars to 401(k) and convert to Roth IRA, exceeding annual contribution limits.
• Conditions: after-tax contributions allowed by 401(k) plan, maxed out traditional 401(k) contributions, high income.
• Requires understanding specific rules and steps.

9. 529 Education Savings Plan

• For education expenses, with tax-free growth and withdrawals.
• No annual contribution limits but subject to gift tax exclusion.
• Personal preferences: moderate contributions due to various cost-effective education funding methods.

10. Taxable Brokerage Account

• Use once all tax-advantaged accounts are maxed out.
• Suggestion: invest in broad market index funds (e.g., Vanguard Total Stock Market Index Fund, VTSAX).

11. Real Estate Investment

• Diversifies income streams and adds stability to financial plans.
• Options: rental properties for extra cash flow or Real Estate Investment Trusts (REITs) for hands-off investing.
• Suggested REIT funds: Vanguard Real Estate Index Fund (VGSLX) or Vanguard Real Estate ETF (VNQ).

12. Pay Down Low-Interest Debt

• Debt with less than 3-5% interest rates (e.g., home mortgage).
• While not financially optimal, it provides peace of mind for some.
• Focus on personal financial comfort over maximizing potential returns.