Business owners, professionals and executives often find themselves in a situation where they would like to put a larger percentage of their earnings into their retirement plans, but they are told they can’t because they have already met the contribution limits. But this answer is only partly correct.
It may be that they can’t put any more in their main, qualified plan (such as a 401(k) or SEP); but that doesn’t mean that other options don’t exist.
A core principle in the creation of qualified plans is that they are not supposed to disproportionately favour high wage earners over rank-and-file employees. One way that this is accomplished is by putting limits on what can go into the plan. The benefits of making a current contribution are substantial: those dollars are deducted from taxable income, and then they grow tax deferred, sometimes for decades, until they are withdrawn in retirement. Giving high wage earners unfettered access to this mechanism would get in the way of the egalitarian mission that is codified in the rules and laws which govern these plans. So there are caps on what a person can put into the plan. Most people are aware of these limitations.
What most people are not aware of however is the existence of a whole other class of savings structures which fall outside the rules for qualified plans. These plans, unfortunately lack the ability to grant a current tax deduction. But once the taxes are paid, they can provide a way to get tax-deferral on future growth. Perhaps best of all, there are no requirements about including all of a company’s employees, and there aren’t any caps on how much can be contributed each year.
Wage earners who max their contribution limits on qualified plans are stuck paying the taxes on excess earnings, anyway. But those who move the excess into non-qualified retirement plans can still get the benefit of the deferral, which over time can grow to be a bigger benefit that the deduction in the first place.
The use of a non-qualified plan can lead to faster rates of growth in retirement savings, and save the wage earner tens or even hundreds of thousands of dollars in taxes during their working years.
Anyone who has been told that they can’t contribute more to their qualified plan should not make the mistake of thinking that they can’t contribute to anything at all. There are secondary plans which are available for these cases. They are relatively simple to establish, and they can be a key factor in making it possible to get the most out of earned income which is not required for immediate budgetary needs.