Tax tips for HENRYs: 5 end of year moves if you are High Earner Not Yet Rich

Despite their high earnings, HENRYs have the “perfect storm” of factors weighing down their finances, says Bill Harris, former CEO of TurboTax and PayPal. They typically live in metro areas with an increasingly high cost of living. They also typically have high expenses, particularly as they transition from DINKs—dual income, no kids—to HENRYs paying for larger homes and their kids’ educations. And because they are more likely to be educated themselves, they have the student loan debt to go with it.

Then there are the taxes. Not only do HENRYs have a high marginal federal rate, but if they live on the coasts, they will have a high local and state tax burden.

“As silly as it is, given the lifestyle that they’ve chosen—including, most likely, that both spouses work, so you have childcare costs—it’s remarkably difficult to make ends meet on very high compensation,” says Harris. “It sounds ludicrous to people not in that particular situation, but they have a hard time saving.”

Here are some ways HENRYs—or really anyone with substantial earnings—can lower their tax bill.

1. Max out retirement accounts

It’s not the most exciting or novel item on the list, but it is one of the most effective: One of the easiest ways to lower your taxable income for the year is to contribute the maximum amount to retirement accounts, for both you and your spouse.

If you have access to a workplace 401(k) or similar account, you can contribute up to $23,000 this year (plus an extra $7,500 if you’re over 50). For individual retirement accounts—including spousal IRAs—the limit is $7,000 (or $8,000 if you’re over 50).

Next year, the deal is even better for some savers: Starting in 2025, those aged 60 to 63 can contribute up to $11,250 in extra funds to their 401(k)s.

2. Don’t forget about the HSA

For those enrolled in a high-deductible health plan, a health savings account (HSA) is another great way to lower your tax bill while also saving for the future.

Praised by financial experts for its triple tax advantages, the HSA allows account holders to not only save pre-tax dollars—meaning you deduct your contributions from your taxes—but it allows those dollars to be invested and grow tax-free, as well. When the funds are taken out to pay for qualified medical expenses, there is no tax due then, either. If you’re past 65, there are no taxes due on non-medical withdrawals.

That makes these accounts an even better deal than a 401(k) or IRA, experts say. Plus, your employer may also offer HSA contributions, making it an even better deal. And unlike with a flexible spending account, or FSA, you do not need to spend the money during your plan year. Even if you leave your company, the money in the account is yours until you need to spend it—which can make investing it a compelling offer, particularly for younger, healthier workers. There are also no required minimum distributions.

The contribution limit is $4,150 for individual coverage and $8,300 for families in 2024.

3. Consider a backdoor Roth conversion

People with high incomes cannot invest directly to Roth IRAs, which is a shame, says Harris, because a Roth is the “holy grail” of retirement vehicles. You invest money that has already been taxed, and then it can grow tax-free until you tap into it.

Enter the backdoor Roth: You can convert funds from an IRA to a Roth IRA. To do so, you’ll need to open a Roth IRA at a brokerage or other financial institution and fill out the appropriate paperwork. If you are converting deductible, pre-tax contributions from a traditional IRA, you will be taxed at your ordinary income rate that year, so be sure that you have enough cash on hand to pay those taxes. People often space out Roth conversions over multiple years to lower their tax bill.

Once the money is transferred in, both the earnings and the original contributions are tax-free forever. There are no required minimum contributions attached to Roths, so you can pass the investments on to your heirs.

“This is the way people with high incomes get their money into a Roth, and that has tremendous power,” says Harris. “A Roth is a huge and valuable way to plan for retirement and legacy.”

4. Plan out family gifting

One way to lower potential future tax burdens is to give some of your money away, particularly to children or other family members. This year, individuals can give up to $18,000 to a single person (and couples can give up to $36,000) without having to report it to the IRS.

But Harris advises families to think outside the gift box, and give their kids appreciated securities rather than cash to help lower capital gains taxes. To do this, you can open a custodial account for your children at your financial institution, and instruct your broker to move the assets to the new account (don’t sell them first, simply move them).

“Then you’re moving the appreciation down to a generation at a lower tax rate,” he says.

5. Be smarter with charitable contributions

Most people don’t generally give to charity because of the promise of a tax deduction. But with some planning, your charitable contributions can do good for the world—and your tax bill.

One thing many people may not consider, as with family gifting, is donating appreciated securities. This is where a donor advised fund (DAF) comes in. These accounts allow you to contribute appreciated securities or other assets with the intention of going to a qualifying charitable organization; you get the tax break immediately, but you don’t necessarily have to decide what charity or nonprofit to send the money to right away.

“It’s not your money, you can’t take it back, but you decide how much to whom and when,” says Harris. “It’s a beautiful multi-purpose account.”

You contribute the securities (or other things like cash) to the DAF, and then the funds can be invested for tax-free growth. These are becoming increasingly popular as the philanthropically-minded discover they are a way to maximize the dollars they would have donated anyway.