As an executive, managing your income and retirement plans is a crucial part of securing your financial future. Whether you’re earning through stock options, restricted stock units (RSUs), or bonuses, your income can fluctuate dramatically from year to year. This can sometimes push you into higher tax brackets, increasing your taxable income for the year.
But don’t worry, there are strategic ways to manage this income and ensure you’re putting money aside for retirement, all while reducing your taxable income.
Here’s a closer look at how you can use your retirement plans to your advantage and effectively reduce your income for the current year while saving more for the future.
1. Maxing Out Your 401(k) Contributions
One of the most straightforward strategies available to executives is contributing to your 401(k) before taxes. This is known as pre-tax contributions, and for 2025, the contribution limit is $23,500.
If you’re over 50, you can take advantage of the additional $7,500 catch-up contribution, bringing your total annual contribution limit to $31,000. This helps reduce your taxable income and ensures you’re setting aside a substantial amount for retirement.
2. After-Tax Contributions for a Backdoor Roth IRA
But what if you’ve already maxed out your 401(k) and still find yourself with high income that pushes you into a higher tax bracket? You might still have the option to contribute after-tax money into your 401(k).
While this won’t immediately reduce your taxable income for the current year, it sets you up for a backdoor Roth IRA conversion in the future. After-tax contributions can grow tax-deferred, and when converted to a Roth IRA, the funds will be eligible for tax-free growth.
However, it’s essential to remember that there’s an overall contribution cap of $70,000 for 2025, which includes:
- Your pre-tax contributions
- Roth 401(k) contributions
- Employer contributions
- Profit sharing from your employer
Once you reach that cap, you can continue contributing after-tax dollars, but be mindful of the limits to avoid exceeding them.
3. Leveraging Non-Qualified Deferred Compensation
For many executives, a key strategy for deferring income is utilizing non-qualified deferred compensation (NQDC) plans. These plans allow you to set aside a portion of your compensation to be paid out at a later date, typically in retirement. By deferring this income, you reduce your current taxable income and shift the tax burden to when you begin to receive the payouts, typically at retirement age.
While you’ll still pay some taxes today (such as Medicare and Social Security taxes), you can defer the rest of your tax obligations until you start receiving payments—usually around age 65.
These payments can be made monthly or as a lump sum, depending on the plan structure, and the funds can be invested in a variety of vehicles to grow over time.
4. Strategic Planning for Executive Compensation
As an executive, your compensation package may consist of various elements, including bonuses, stock options, and RSUs, each of which can impact your retirement planning. It’s important to understand how these elements interact with your overall retirement strategy and tax situation.
By working with a financial advisor, you can create a tailored strategy to maximize your retirement savings while minimizing taxes and managing income fluctuations. This may involve optimizing your 401(k) contributions, utilizing after-tax contributions for future Roth conversions, or leveraging non-qualified deferred compensation options.
Conclusion: Building a Robust Retirement Plan
With the right strategies in place, you can effectively reduce your taxable income for the year while ensuring you’re setting aside as much as possible for retirement.
Whether you’re contributing to your 401(k), utilizing after-tax contributions for future Roth conversions, or deferring income through non-qualified compensation plans, there are many ways to take control of your financial future.
If you’re an executive looking to better manage your income and retirement plans, feel free to reach out. We’re here to help you understand your options and make informed decisions to secure your future.
