Authored by Eric Van Der Hyde, CFP®, CEPA®, RICP®

Contributing the maximum to your employer’s 401(k) plan can be a huge step toward building your retirement. But for executives and other high-income professionals, it often only gets you part of the way toward the level of savings you’ll need to maintain your standard of living in retirement.

The next step becomes more complex when you are compensated with bonuses, restricted stock, stock options, or deferred compensation. Each brings unique opportunities, deadlines, and tax implications. Making the right decision on where to allocate your savings next requires careful evaluation of how these elements interact and the development of a plan to ensure they continue to work together for years to come.

Start with what the money needs to do

Before choosing another account, consider when you will need the money. Are you building retirement assets, funding a purchase in the next few years, or creating flexibility to retire before you can comfortably draw on retirement accounts?

Also review your cash reserves and upcoming tax obligations. Bonus and equity-compensation withholding may not cover your actual tax liability. Setting aside money for those obligations helps avoid committing funds to an account or compensation arrangement that makes them difficult to access.

Once those needs are covered, consider where to save next based on what you’re saving for, when you’ll need the money, how each option is taxed, and which savings programs your employer offers.

Check additional tax-advantaged opportunities

A few options deserve a look before you assume you have exhausted your tax-advantaged savings opportunities:

• Health savings account (HSA): If you meet the eligibility requirements, an HSA offers tax-advantaged contributions and growth, with tax-free withdrawals for qualified medical expenses. It can help fund current expenses or build a reserve for future health care costs.
• Backdoor Roth IRA: Higher earners who cannot contribute directly to a Roth IRA may be able to make a nondeductible traditional IRA contribution and then convert it.
• Mega backdoor Roth: Some workplace plans permit additional after-tax contributions beyond the regular employee deferral limit, along with Roth conversions or eligible rollovers. Availability depends on plan rules, and converting associated pretax earnings can create a tax bill. And in case you’re wondering, “Mega backdoor Roth” is the industry-adopted term – I did not make it up!

These strategies require a review of eligibility, contribution limits, and account balances before implementation.

Evaluate nonqualified deferred compensation carefully

If your employer offers a nonqualified deferred compensation (NQDC) plan, you may be able to defer a portion of salary or bonus and the associated income taxes until payment. This can create additional savings capacity during high-earning years.

The payout schedule deserves as much attention as the deferral amount. Consider how payments could overlap with future salary, other deferred compensation, and retirement-account withdrawals. A large payout in one year could undermine the tax benefit you expected.

You also need to assess employer credit risk: NQDC benefits generally represent an unsecured promise from the company and can be lost if it becomes insolvent. Elections typically must be made in advance, and changes are restricted. Review the plan's rules for payments after retirement or a job change, along with how much accessible savings you will retain elsewhere.

Give employee stock purchases and equity awards a role

An employee stock purchase plan (ESPP) may let you buy company shares at a discount through payroll deductions. Review the discount, any lookback feature, sale restrictions, and tax treatment before deciding how much to contribute and when to sell.

Consider those shares alongside your restricted stock, stock options, and other employer exposure. Your paycheck, equity awards, and deferred compensation may already depend heavily on one company's success.

A planned approach to selling shares and directing proceeds toward other goals can help turn compensation into diversified savings. Holding periods and potential tax benefits should be weighed against concentration risk and your need for cash.

Build a taxable investment portfolio with purpose

A taxable brokerage account can play a substantial role in a high earner's plan. It has no annual contribution cap or income eligibility limit, and funds can support goals before or during retirement without retirement-account withdrawal restrictions. Dividends, interest, and realized gains can create taxes along the way.

That makes the way you invest especially important. At Concentric Wealth Partners, we help clients with tax-efficient asset location: deciding which investments to hold in taxable, tax-deferred, and Roth accounts while maintaining an appropriate overall portfolio.

For example, investments that generate substantial taxable income may be better suited to tax-deferred accounts, while certain tax-efficient stock investments may fit well in taxable accounts. The right placement depends on your tax rates, time horizon, available accounts, and investment goals. Each account does not need to hold the same mix of investments.

Ongoing management matters, too. Choosing which shares to sell, directing new savings toward investments that need more weight in your portfolio, and limiting unnecessary trading can help manage tax costs. When appropriate, selling investments at a loss may also help offset taxable gains from other sales.

We coordinate these decisions with your broader financial plan and, when appropriate, your CPA. That includes reviewing the taxes involved in reducing a large holding of employer stock, deciding when to sell investments, and planning how withdrawals may eventually support your retirement spending. The goal is to manage taxes while keeping your investments aligned with your needs and long-term goals.

Keep the plan moving as your compensation changes

Picture an executive with a salary, an annual bonus, restricted stock, and eligibility for a deferred compensation plan. A coordinated wealth plan may set aside a portion of the bonus for taxes, earmark another portion for taxable investments, develop a strategy for your vested shares, and determine your next year's election to the deferred compensation plan in light of expected retirement income.

Those decisions need follow-through. At Concentric Wealth Partners, we emphasize proactive guidance, attention to detail, and accountability. We help coordinate your advisory team, monitor the plan as compensation and circumstances change, and support implementation of agreed-upon steps. That can include reviewing upcoming elections and vesting events, coordinating tax questions with your CPA, and revisiting savings and retirement projections.

If you have maxed out your 401(k) and are wondering where to save next, we invite you to schedule a review of how your compensation, savings choices, and long-term retirement goals fit together. We can help you evaluate your options and develop a coordinated strategy, with ongoing guidance to support implementation as your needs evolve.

Contact Concentric Wealth Partners: https://www.concentricwealthpartners.com/contact-us