Tech businesses and employees should have retirement account options that fit their needs. While they could stick with the traditional 401(k) plan, many other types offer more significant tax benefits and fewer restrictions.
Why Does the Tech Industry Need Special Accounts?
Tech workers’ incomes hit a record high in 2021. The average salary reached over $104,500, with many jobs seeing more than 10%-20% growth in earnings from 2020. Even though this increase is fantastic, it made some of the most popular retirement plans inaccessible.
The tech industry has one of the highest-earning workforces of any sector. Because of this, adequate retirement accounts capable of supporting its unique needs are vital. Fortunately, businesses and employees can work together to find the right plans.
What Should Tech Workers Look for in Retirement Plans?
The tech industry needs retirement account options that can support high earners and inconsistent cash flow. Flexibility is crucial since the average worker makes over six figures and businesses do not always have profitable years. However, the government puts contribution and withdrawal restrictions on many popular plans.
The best accounts maximize savings by having no tax on withdrawal and tax-free growth. Additionally, they lower taxable income by putting people in a lower bracket and making contributions deductible. These small advantages add up significantly over time.
Since tech businesses and workers operate in a fast-paced, high-income environment, they need unique accounts. Benefits like penalty-free early retirement, alternative investing and tax advantages are essential. Fortunately, plenty of specialized options fit this criteria.
Retirement Account Options for the Tech Industry
These plans are ideal if you are looking for better tax advantages, income limit workarounds or tax-free investment growth.
1. Roth 401(k)
While a traditional 401(k) is one of the most popular retirement account options, a Roth 401(k) offers unique tax benefits. The government deducts income taxes before you contribute, meaning it does not tax your withdrawals.
2. Backdoor Roth IRA
While a traditional Roth individual retirement account (IRA) provides tax-free withdrawals, it has income restrictions. If you make too much, you cannot legally contribute. Fortunately, the backdoor technique offers a legal workaround. You can convert an IRA to a Roth IRA or roll a 401(k) over to a Roth IRA.
A backdoor Roth IRA gets around income limits while ensuring tax-free withdrawals, making it one of the best retirement account options for high earners. It also benefits businesses because it allows fewer contributions toward employer-supported plans.
3. Health Savings Account
Even though a health savings account covers health care rather than contributes toward savings, you can use it as a retirement plan. You pay no withdrawal taxes when you use it for medical expenses. It also grows tax-free and lowers your taxable income. Best of all, you can use the money for any purpose when you reach 65.
4. Safe Harbor 401(k)
A Safe Harbor 401(k) does not require annual nondiscrimination testing, allowing maximum retirement savings. In exchange for mandatory employer support, the Internal Revenue Service (IRS) does not cap contributions like it would with a traditional 401(k) plan.
5. Savings Incentive Match Plan for Employees IRA
Where a traditional IRA does not require employer contributions, a Savings Incentive Match Plan for Employees (SIMPLE) IRA does. However, the requirements are low and inexpensive. Additionally, it gives the small-business owner more power to set standards. Employees benefit because they can save more.
6. Self-Directed IRA
A Self-Directed IRA (SDIRA) is for investment-oriented tech workers. It opens possibilities to alternative assets, including cryptocurrency, startup equity and real estate. Small tech businesses have the power to give their support at their discretion.
7. Profit Sharing
Although profit sharing sounds like a plan only massively successful tech businesses can take advantage of, it is an excellent choice for anyone. Despite its name, employers do not need to be profitable to contribute. On the other hand, their support is entirely discretionary — they can give however much they want. It is ideal for startups and those with inconsistent cash flow.
8. Nonqualified Deferred Compensation
A nonqualified deferred compensation (NQDC) plan — also known as the 409A plan — is for high-income tech workers who want to maximize their retirement savings. Instead of accepting their income, they defer it and receive multiple tax benefits. Best of all, there is no contribution limit.
Will Every Tech Business Offer These Options?
While the average retirement age was 62 in 2022, tech workers can retire earlier. After all, most retirement account options like a Self-Directed IRA, Safe Harbor 401(k) and nonqualified deferred compensation plan have no withdrawal penalty after 59.5 years of age. However, it may be worth it for them to stay in the industry to maximize their savings.
Either way, their choice is dependent on where they work. After all, business owners determine the availability of specialized retirement account options. While some may not offer unique types like profit sharing or a SIMPLE IRA, employees still have much to choose from. For instance, a backdoor Roth IRA and a Roth 401(k) are widely accessible.
Even though some of these plans have contribution restrictions or tax withdrawals, almost all are more advantageous than a traditional 401(k) or IRA. They offer various tax advantages, minimal income limitations and high flexibility. Overall, they are ideal for businesses and workers in the tech industry.
Why Should You Choose These Retirement Plans?
Even though 401(k) income deferral increased to $22,500 in 2023 — up $2,000 from 2022 — a fair amount of high-earning workers still maxed out their contributions. Fortunately, they can look to other retirement account options to maximize their savings. Preferably, they would choose ones without income caps or withdrawal penalties to reduce the amount of red tape.
While versions like a Self-Directed IRA, a Safe Harbor 401(k) or a SIMPLE IRA technically penalize early withdrawals with a minor percentage-based penalty, they offer much greater flexibility. Businesses that prefer discretionary contributions and employees who want alternative investment support will appreciate having these options.
The Best Retirement Account Options in the Tech Sector
Retirement accounts like profit sharing, backdoor Roth IRA and Safe Harbor 401(k) give tech businesses and employees flexibility. Discretionary contributions, tax-deductible support and less IRS involvement allow for maximum savings on both ends.