Investment Strategies for Entrepreneurs, Retired Business Owners and Financially Independent Professionals

Key Takeaways:
  • Employer-sponsored plans, HSAs and IRAs each offer unique tax advantages to help you grow and protect your wealth.
  • Taxable investment accounts provide flexibility and opportunities for strategic tax planning.
  • A tailored investment strategy, guided by professional advice, is key to navigating complex financial needs and securing your future.

 

When you’ve achieved financial success—whether as a retired business owner, a financially independent individual or a successful professional—your financial needs and opportunities become more complex. While you may not describe yourself as “high-net-worth,” your unique situation often demands tailored investment strategies. By understanding and leveraging different types of investment accounts, you can enhance tax efficiency, grow your wealth and secure your financial future. This article explores key account types and strategies to optimize your investments.

Employer-sponsored Retirement Plans: 401(k) and 403(b) plans

Employer-sponsored retirement plans offer individuals with high wages (those with yearly wages more than $79,000 for single and head of household filers and $126,000 for joint filers) a tax efficient way to contribute a significant amount of their earnings. For 2025, employees can defer up to $23,500 of income each year. Individuals age 50 and over can make catch-up contributions of an additional $7,500 and individuals age 60-63 can make catch-up contributions of up to $11,250.

Many employer-sponsored retirement plans are now offering a Roth contribution option for participants. This allows for employee contributions to be taxed in the year the wages were earned, with the distributions (including investment growth) to not be taxed when withdrawn from the retirement account. For those with high incomes, this may be the only option to contribute to a Roth account.

Employer-sponsored plans typically include some type of employer contribution, whether it is a matching contribution or nonelective contribution. Taking advantage of these employer contributions brings an immediate return on investment since it is not dependent on how well the investments perform.

One drawback of employer-sponsored retirement plans is their investment options are typically limited to funds chosen by the employer. Therefore, the investment options may be limited compared to the options that you may have in your other investment accounts.

Health Savings Accounts (HSAs)

HSAs are a tax advantage account allowing those with a qualified High Deductible Health Insurance Plan to contribute money pre-tax and allows for tax-free distributions for qualified medical expenses. Any earnings within the HSA are also tax-free. For 2025, the contribution limit to an HAS is $4,150 for self-only coverage and $8,300 for family coverage. HSAs can indefinitely carry forward indefinitely remaining funds to future years, which allows them to be used in retirement as well.

While traditionally most HSAs act as a savings account with a low interest rate, many HSAs now provide the opportunity to invest in mutual funds. For high-net-worth individuals, this can provide tax advantages by allowing for additional pre-tax contributions outside of an employer retirement plan that can then be used tax-free in retirement if used for qualifying medical expenses. Once you reach age 65 you can also distribute money from an HAS for nonmedical expenses, you will just have to pay income taxes on the distributions for nonmedical expenses.

Individual Retirement Accounts (IRAs)

IRAs are a type of tax advantage accounts that typically have more flexibility in investment options than employer sponsored retirement plans. IRAs come in two different types, traditional and Roth, that have their own benefits and restrictions for high income earners.

  • Traditional IRAs: With traditional IRAs, contributions are tax deductible; however, qualified distributions from these accounts are taxable.

Contributions are tax-deductible if you are not an active participant in an employer-sponsored retirement plan and your adjusted gross income (AGI) is below certain thresholds. For single and head of household filers covered by an employer retirement plan, contributions are phased out starting at $79,000 of AGI and completely phased out at $89,000 of AGI. For married couples filing jointly, the income limits differ based on if the contributing spouse is covered by an employer retirement plan or if the other spouse is the only one covered by an employer retirement plan. If the spouse making contributions is covered by an employer retirement plan, the deduction starts phasing out at $126,000 of AGI and completely phased out at $146,000. If the spouse making the contribution is not covered by an employer retirement plan but the other spouse is, the deduction starts phasing out at $236,000 of AGI and is completely phased out at $246,000 of AGI.

Distributions before age 59 ½ also come with a 10% early withdrawal penalty on your tax return unless an exception applies. If you are age 70 ½ or older and charitably inclined, you have access to make distributions directly from your Traditional IRA to a charity using a Qualified Charitable Distributions (QCDs). QCDs have the benefit of not being subject to income taxes, even though they come out of a Traditional IRA account. QCDs also count toward your required minimum distributions (RMDs). RMDs are required distributions once you reach age 73 (scheduled to increase to 75 in 2033), with the required distribution amount calculated based on account balance and the IRS life expectancy tables.

  • Roth IRA: For Roth IRAs, contributions are made with after-tax dollars, but qualified distributions are tax-free. For joint filers, Roth IRA contributions are phased out starting at $236,000 of AGI and is completely phased out at $246,000. For single filers, Roth IRA contributions are phased out starting at $150,000 and completely phased out at $161,000.

In addition to the early withdrawal penalty for distributions that traditional IRAs have, Roth IRA distributions can only be made five years after the original contribution to set up the Roth IRA.

  • Roth IRA Conversions: You may have used pre-tax retirement accounts to reduce your taxable income in high income earning years or couldn’t contribute to a Roth IRA due to your income. In future years, you can convert your pre-tax account into a Roth IRA to reduce your future taxes if you expect to have a higher tax burden when you retire.
  • Nondeductible Traditional IRA: Nondeductible traditional IRAs are traditional IRAs in which no deduction is made, but earnings grow tax deferred. Meaning that withdraws are taxed as ordinary income, except for the portion representing nondeductible contributions, which is tax-free. Contributions to nondeductible traditional IRAs are typically used to allow for the funds to be converted into a Roth IRA for those that are above the income limits for contributing directly to a Roth IRA. This strategy is often referred to as a backdoor Roth IRA.
  • Inheriting Traditional and Roth IRAs: While IRAs provide more flexibility during your lifetime, it does come with drawbacks for those that may be inheriting the IRA. After the passing of the SECURE Act all inherited IRAs, whether traditional or Roth, are subject to the same rules for continuing RMDs if the deceased beneficiary had already started taking RMDs and the requirement that all assets must be withdrawn within 10 years of the deceased beneficiary’s death. This can cause unintended consequences, especially for traditional IRAs, in which income will be claimed by the inheriting individual that may be at a higher tax bracket than the deceased beneficiary was at their death.

Taxable Investment Accounts

Taxable investment accounts provide the most flexibility compared to any other investment account in terms access to funds with little to no investment liquidation penalties. There are also no withdrawal penalties by the IRS for withdrawal of funds from taxable investment accounts. With no IRS penalties for withdrawing, funds from these accounts are more available to pay for large expenses (buying a house or car) or even to fund your retirement prior to the IRS penalty free retirement age of 59 ½ for IRAs.

Unlike a tax advantaged retirement account, income generated by the investments (interest, dividends and realized gains) are taxed in the year they were earned in the account even if you do not withdraw the funds from the investment account or reinvest that income. As your investment income increases, you may also unexpectedly owe taxes if you are not withholding enough from other sources of income or paying enough in quarterly tax payments. Having regular communication between your investment advisor and tax advisor can help reduce your exposure to tax underpayment penalties due to unforeseen earnings.

Taxable investment accounts also allow for income to be taxed at more preferential rates than the ordinary income rates that distributions from employer-sponsored plans and IRAs are taxed at. Furthermore, taxable accounts typically have more tax-efficient investments that have lower turnover and fewer capital gain distributions, and some income may be tax-exempt on your federal and/or state tax returns.

Questions?

Whether you are a retired business owner or successful professional, your financial success opens up opportunities to optimize your investment strategy. By leveraging the unique benefits of various account types and seeking professional guidance, you can build a tax-efficient portfolio that secures your future. Contact an Adams Brown advisor to start optimizing your investment strategy.