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5 Money Realities High Income Earners Should Be Thinking About

Over the past few months, we’ve heard quite a lot about “the rich” vs. “the middle class [3],” and how high income earners live different lives.

And, while it’s a nice thought that we’re all just folks, the truth is that high income earners, and high net worth individuals, do face their own challenges, and they might have financial issues that many of those in the middle class don’t have to deal with.

Here are some of the realities, beyond higher income and estate taxes, that you might need to prepare for if you are a high income earner:

1. More than $250,000 at Any One Bank

One of the problems that high income earners might run into is having more than $250,000 with one bank. This is an issue, since the FDIC protection [4] only applies to depositors at a single bank (a married couple with both names on accounts, gets $500,000 of coverage). It’s important to understand that all of the accounts at one bank are pooled for coverage. You don’t get coverage on each account.

If you want to make sure your money is as safe as possible, you need to divvy things up so that some of your money is at other banks, or you could consider using the money to purchase savings bonds so that the money is still protected, but you don’t have to worry about the FDIC issues.

2. Is Your Homeowners Insurance Sufficient?

Some high net worth individuals stock their homes with valuable items. These items can include antique furniture, fine art, and expensive jewelry. When you add up all of that value, you might realize that your homeowners insurance is lacking. If you have particularly valuable pieces, you might want to get special coverage for those items. Double check your insurance, and make sure that your valuables are properly covered.

3. Do You Have Enough Liability Insurance?

Those who are high income earners — especially those that aren’t shy about what they make — can find themselves targets of lawsuits. Someone who is high profile and is known as a high net work individual might be sued for more than someone with less money.

If you don’t have umbrella insurance [5], you might not be adequately protected. If you are a business owner, you might need other types of liability insurance, including errors and omissions insurance or other types of insurance. Double check your policies to make sure that you are covered as you need so that you are able to handle large judgments if needed.

4. Contributing to a Roth IRA

If you make more than $188,000 as a married filing jointly couple, or make more than $127,000 as a single filer, you can’t contribute to a Roth IRA. (There are no income limits for contributing to a Roth 401(k).) However, it’s possible to get around that with contributions to a non-deductible traditional IRA, and then convert that to a Roth. You do have to be careful with this maneuver, though, because al of your IRAs are lumped together in the eyes of the IRS, so you might still owe taxes if you multiple deductible IRAs on top of your nondeductible IRA. Consult with an accounting/tax professional for strategies that can help.

5. High Fees with Your Wealth Manager

Finally, understand that you might not be getting the best deal for your money. Check the fees with your wealth manager, and check which products your investment advisers are pushing. Sometimes, you don’t need a high-priced and “fancy” investment product. Even high earners can benefit from low-cost funds and similar investments. Compare costs, and switch if it is warranted.

(Photo: laverrue [6])