For over two decades, I have helped Heads and Administrators prepare for life after school with financial confidence. This is a more in-depth article that dives deeper into what I believe every school leader should know about savings strategies as they step into a new role.
Congratulations on your new Headship! Whether it’s your first or you’re stepping into another esteemed role, this transition marks an exciting time in your life. For those new to a Headship, your income may have increased significantly. If you’re in subsequent headship and/or administrator roles, your salary may remain consistent, but this is a perfect opportunity to rethink your financial strategy.
This article is a detailed guide on strategic financial planning for individuals stepping into that new headship/administrative position. This content provides a comprehensive roadmap for managing finances effectively, from building a solid foundation to exploring advanced wealth-building strategies.
Building Foundations and Prioritizing Goals
For many Heads, initial financial decisions involve selecting tax-preferenced accounts tailored to specific goals—covering medical expenses through an HSA, saving for children’s education via 529 plans, or securing retirement with traditional and Roth accounts. Recommendations from Board members or their Chief Financial Officers often guide these choices. However, it’s essential to focus first on foundational priorities such as establishing a robust emergency reserve before allocating resources to specific goals. This ensures financial security while preparing for future savings and income growth.
Beyond Basic Needs
High-income Heads earning $300,000 or more typically have their foundational needs like emergency funds, education savings, and medical expenses covered. The focus then shifts to maximizing retirement savings, building family wealth, and optimizing the growth of excess dollars. The key question becomes not "if" a particular account will be used, but "how" to prioritize and maximize growth across multiple financial vehicles.
Creating a Savings Hierarchy
Relative to the alternative of simply keeping available dollars “liquid” in a bank account or a traditional (taxable) investment account, the appeal of tax-preferenced accounts is, by definition, their tax preferences. Which means, not surprisingly, the optimal approach amounts to maximizing the most tax-preferenced accounts first, and as those accounts are maximized, allocate subsequent funds to the next best tier on the hierarchy.
Below are the hierarchy tiers.
Tier 1: Triple-Tax-Free Health Savings Accounts (HSAs) for Retiree Medical Expenses
HSA Benefits: HSAs offer triple-tax advantages as they are tax-deductible contributions from federal, state, and FICA taxes. They also allow tax-deferred growth and tax-free distributions for medical expenses. In 2025, the contribution limits are $4,300 for individuals and $8,550 for families (plus a $1,000 catch-up contribution for those over 55).
Maximization Strategy: High-income earners can optimize HSAs by paying out-of-pocket for current medical expenses while contributing the maximum amount allowed to the HSA. This allows the HSA funds to grow tax-deferred and tax-free, creating a robust reserve for retirement medical costs.
Permitted Uses in Retirement: HSA funds can cover a wide array of medical expenses, including Medicare deductibles, long-term care costs, and insurance premiums (with certain exceptions like Medigap premiums).
Eligibility Caveat: HSAs are only available to individuals whose schools offer a high-deductible health plan(s) (HDHPs). For 2025, HDHPs must have minimum deductibles of $1,650 for individuals and $3,300 for families. Many high-income households prefer HDHPs due to their capacity to self-insure larger deductibles.
Tier 2: Double-Tax-Preferenced Retirement Accounts (And Deferred Comp and 529 Plans)
Types of Accounts: Includes traditional or Roth-style IRA/403(b)/401(k)/457 accounts that offer tax-deferred growth and either upfront tax deductions (traditional) or tax-free distributions (Roth). There may also be a “school match” for your 403(b)/401(k) contribution which should not be overlooked.
Roth vs Traditional Contributions: For high-income earners, traditional accounts are often more advantageous due to immediate tax deductions at top rates, which outperform Roth-style accounts unless future tax rates are higher. Partial Roth conversions can be done later during lower tax years.
Contribution Limits: Maximize contributions, e.g., $23,500 for a 403(b)/401(k)/457 plans (plus catch-up contributions for individuals over 50). Additional catch-up options are available for those aged 60–63 or with 15+ years of service.
Deferred Compensation (457 Plans): Adds further tax-advantaged savings beyond 403(b)/401(k) limits, though funds are tied to the employer’s financial health which should be closely reviewed
529 Plans for College Savings: For those Heads who are saving for children’s or grandchildren’s college education, it is appealing to leverage 529 college savings plans at this tier, to maximize the opportunity for tax-free growth, especially for younger children who have a decade or more to benefit from tax-deferred compounding growth. This is ideal for long-term, tax-free growth, especially for families aiming to build intergenerational educational funds.529 Plans for College Savings: For those Heads who are saving for children’s or grandchildren’s college education, it is appealing to leverage 529 college savings plans at this tier, to maximize the opportunity for tax-free growth, especially for younger children who have a decade or more to benefit from tax-deferred compounding growth. This is ideal for long-term, tax-free growth, especially for families aiming to build intergenerational educational funds.
Tier 3: Tax-Free (Backdoor) Roth Accounts
Prioritization: High-income earners should prioritize pre-tax retirement accounts before considering Roth-style accounts through partial Roth conversions
Non-Deductible IRA Contributions: Making after-tax contributions to non-deductible IRAs avoids the 3.8% Medicare surtax on investment growth but lacks broader tax-preferenced advantages unless converted to a backdoor Roth.
Backdoor Roth Contributions: High-income individuals can bypass Roth income limits by converting non-deductible IRA contributions into Roth IRAs. However, this step should follow maximizing HSAs and pre-tax 401(k)/403(b)/457 contributions.
Key Considerations: Be mindful of the IRA aggregation rule to avoid unintended taxation during conversion. Non-working spouses can also leverage Spousal IRA rules for backdoor Roth contributions.
Tier 4: “Basic” Tax-Deferred Growth
Tax-Deferred Growth Vehicles: These options lack upfront tax deductions or tax-free distributions but allow for tax-deferred growth. These include non-qualified deferred annuities, permanent life insurance, and taxable brokerage accounts.
Non-Qualified Deferred Annuities: Provide tax-deferred growth outside retirement accounts, with low-cost "Investment-Only Variable Annuities" (IOVAs) as a viable choice for high-income individuals seeking tax deferral for growth-oriented investments.
Permanent Life Insurance: Used historically for tax deferral through cash value growth, but less appealing today compared to low-cost annuities due to borrowing limitations and potential adverse tax consequences.
Taxable Brokerage Accounts: Long-term growth assets like zero-dividend stocks or tax-managed mutual funds mimic tax-deferred growth by deferring capital gains until sold, with the added benefit of preferential capital gains tax rates.
Tier 5: Maximizing Family Wealth & Minimizing Estate Taxes With (Grantor) Dynasty Trusts
For families whose net worth is approaching or exceeding the federal estate exemption threshold, there are complex strategies to preserve your wealth and minimize estate taxes (such as grantor dynasty trusts). This is particularly useful for those educators who are beneficiaries of multi-generational wealth. Although this topic is outside the scope of the article, it allows for further exploration that is tailored to this unique audience.
A Word About Taxable Savings, Emergency Funds, Job Mobility, and Entrepreneurialism
Emergency Funds First: A solid emergency fund and disability insurance are foundational for financial stability. Liquidating tax-preferenced accounts prematurely can result in penalties and lost benefits. Research even suggests that having accessible cash improves overall happiness.
Beyond Basics: High-income households should aim for not just six months of emergency savings but an additional 12-18 months to enable job mobility or entrepreneurial ventures. Liquidity allows for better career decisions, including the freedom to transition from unsatisfying (school) roles.
Invest in Human Capital: The greatest wealth-building opportunity is often investing in oneself—securing higher-earning opportunities rather than solely focusing on tax-preferenced accounts.
Flexibility Over Tax Optimization: It’s important not to let the tax tail wag the investment dog and miss out on the greatest wealth creation opportunity for those who are still working… which is the opportunity to find that headship/administrator position with even better earnings, which can produce many multiples of wealth creation from “just” benefitting from tax-preferenced growth on investment savings. In other words, the best tax-deferred savings vehicle, and compounding wealth opportunity, is often investing in your human capital.
David Brown was the Chief Financial Officer/Business Manager for four private schools and one public school over a 23-year school CFO career that stretched from Massachusetts to Colorado to New York and Rhode Island. During this time, he helped heads and administrators assemble and negotiate benefit packages that would ensure a comfortable life through “end of plan”. For the past ten years Dave has helped his clients effectively plan, save and invest to and spend appropriately through retirement.
For personalized financial planning and/or investment guidance, contact Clear Skies Planning & Wealth Strategies at www.clearskieswealthplanning.com or directly at 720-833-8611.
Clear Skies Planning & Wealth Strategies, Inc provides advisory services through XY Investment Solutions, LLC, an SEC registered investment advisor. All views included in this communication are subject to change. Please contact Clear Skies Planning & Wealth Strategies to receive a copy of our Form ADV and other disclosure information.
Footnote:
This article was inspired by The Hierarchy of Tax-Preferenced Savings Vehicles for High-Income Earners, by Michael Kitces.