Earning a high income is a common financial goal, but when achieved, presents many financial questions:
- What do I do with my new income?
- What will my taxes look like?
- How can I protect my money?
Naturally, many of my clients first approached me when they began to make good money and wanted to ensure 1) that they weren’t overlooking tax implications and 2) they weren’t missing out on new financial opportunities available to them.
Here are five financial considerations you may want to keep in mind about once you start earning a higher income.
1. Lifestyle Creep
While not the most exciting task, updating your budget1 is an essential step in maintaining healthy personal finances, and particularly whenever your income changes. More than 36% of U.S. households earning over $100,000/year still feel that they’re living paycheck to paycheck2 . Having a sound budget that accounts for your fixed and variable expenses each month, can help ensure you avoid this common misstep.
2. Mega Backdoor Roth
If you are already maxing out your traditional or Roth 401(k) contributions, you may be wondering what the next best account is for investing your money. Check to see if your 401(k) plan allows for a third contribution type: “after-tax” contributions, which differ slightly from Roth contributions.
The 2024 contribution limit for your Traditional or Roth contributions is $23,000, but after-tax contributions can allow you to contribute up to $69,000. If your plan offers these after-tax contributions, you’ll likely also have access to a strategy called the Mega Backdoor Roth3 . This is where you’re able to move those after-tax contributions into a Roth IRA, even in amounts above the standard Roth IRA contribution limits ($7,000 in 2024). Another bonus: This strategy isn’t subject to the income limitations for contributing to a Roth IRA, making it especially beneficial for high-income earners.
3. Net Investment Income (NII) Tax
An often-overlooked tax, the NII tax4 ,which went into effect in 2013, is a 3.8% tax on investment-related income for certain high-income earners. Income potentially subject to this tax includes interest income, dividend income, capital gains, and rental income. When your modified adjusted gross income rises above the following thresholds, your net investment income for the year may be subject to the NII tax:
Single: $200,000
Married filing jointly: $250,000
Married filing separately: $125,000
4. Tax Loss and Gain Harvesting
If you have investments in a nonretirement account, it may benefit you explore opportunities for tax loss and gain harvesting. These strategies help you reduce your tax liability by selling positions with either an unrealized loss or unrealized gain.
Perhaps you sold a position at a gain earlier in the year. Selling a position with an equivalent unrealized loss could help you offset any tax implication associated with that gain. This is called tax-loss harvesting5 . Similarly, if you sold a position at a loss earlier in the year, you could sell one of your winning positions to lock in some gains without the full tax repercussions (tax-gain harvesting). Utilizing tax loss and gain harvesting could save you a significant amount on taxes, especially if you find yourself in a higher income tax bracket.
5. Protecting Income
Disability insurance6 can help replace up to 90% of your current pay should you be out of work due to an accident or medical illness. Employers often provide a level of disability coverage through their benefit packages, but it’s especially important for high income earners to review and understand if that coverage is sufficient for them.
Some employer-provided plans may have long elimination periods, or low coverage rates. If the reason you’re missing work is accompanied by costly medical bills (as is often the case), not receiving paychecks at the same time could have compounded negative effects on your financial picture. If you don’t have a policy through work or if it’s not providing the coverage, you and your family need, consider purchasing a private policy that you’ll have the option keeping with you even as you move jobs.
Learn More
I hope this information has been helpful to you as you learn more about how to effectively manage your finances as a high-income earner.
If you earn a high income, chances are you’re a busy professional with a demanding work schedule. Working with us can help save you time, provide you direct access to professional advice regarding your situation, and help you keep accountable in addressing the many important aspects of your financial life.
Together, we can work to keep you on-track towards your financial goals.
Request a consultation with me to learn more.
Read more articles by Roman Moriarty