Personal Finance

I'm 26 and just made $200k more this year than last - what pitfalls should I be wary of?

Maurie Backman

Published: February 3, 2025 5:40 am

Many of us have the goal of earning more money from one year to the next. So for the most part, seeing your income rise substantially is a good thing.

There’s just one problem. A huge jump in income could result in a much larger tax bill than what you’re used to. And if you don’t plan for it, it could be quite painful.

That may the situation this Reddit poster is in. They’re 26 years old working in tech, and their earnings are soaring. They’re looking at about a $200,000 increase in their annual income, and they’re wondering how to manage such a large increase.

Clearly, this is a good problem to have. But with proper planning, this poster — and anyone else in a similar boat — can make the most of their larger paychecks while minimizing their IRS hit.

It’s all about having the right strategy

As a general rule, the more money you make, the more taxes you’re likely to have to pay. So if your income is increasing a lot from one year to the next, it’s important to have a plan for it.

First, if you’re a salaried worker, you may want to have more tax withheld from your paychecks to avoid an underpayment that gets you penalized. You can talk to your payroll department about making that change.

If you’re self-employed, what you’ll want to do here is increase your estimated quarterly payments. If you dig around online, you can find free tools to help you come up with your estimates. But a better bet is to consult a tax professional or accountant.

From there, it’s wise to exempt as much of your income from taxes as possible. To that end, I’d recommend maxing out an IRA or 401(k) plan. If you stick to a traditional IRA or 401(k) instead of a Roth, your contributions will go in tax-free.

You should also see if you’re eligible to participate in a health savings account (HSA). This, too, allows you to contribute funds on a tax-free basis.

Keep in mind that if you’re self-employed, you may be eligible to deduct some of the expenses that are helping you earn your large income. Again, this is where a tax professional comes in handy, as they can help you identify which expenses are deductible. But it’s important to keep solid records of your business-related spending either way.

A financial advisor can help you make the most of your income – and avoid big mistakes

It’s a great thing to see your income take off overnight. But in that situation, you risk making poor decisions, like locking yourself into large expenses or falling victim to lifestyle creep. You might also miss out on opportunities to secure your future if you don’t have help managing a suddenly large paycheck.

So if you’re in a situation where your income has risen significantly, I’d suggest sitting down with a financial advisor to map out a plan and talk about your goals. An advisor can help you make the most of your larger paycheck by setting you up with the right investments and helping you create a realistic budget – one that allows you to enjoy your newfound success without going overboard on spending.

Remember, too, that your suddenly large paycheck may not last forever. With any luck, it will, and your income will just keep growing. But you just never know. So it’s a good idea to capitalize on your current financial situation while you can.