Should High Earners Really Use Roth 401(k)? – Avoid This Mistake + FAQs

Confused about whether a high earner should use a Roth 401(k)? You’re not alone.

Even though over 80% of 401(k) plans now offer a Roth option, only around 1 in 5 savers actually use it. That gap shows just how uncertain many high-income earners are about this decision.

In this comprehensive guide, we’ll demystify the Roth 401(k) question for high earners. You’ll learn:

• Roth vs. Traditional 401(k): The key differences in how each is taxed and which benefits high earners the most.
• Tax Brackets & Retirement: Why your future tax rate (and even where you retire) could matter more than your current income when choosing between Roth and traditional.
• New Law Changes: How recent federal laws (like SECURE Act 2.0) are pushing high earners toward Roth contributions – and what that means for you.
• Advanced Strategies: Smart tactics (like the backdoor Roth and mega backdoor Roth) that let high earners maximize tax-free retirement savings despite income limits.
• Pros, Cons & Pitfalls: The biggest advantages of a Roth 401(k) for wealthy savers – and the hidden downsides and common mistakes to avoid.

The Quick Answer: Is a Roth 401(k) Right for High Earners?

For many high earners, a Roth 401(k) can be a powerful tool, but it’s not a one-size-fits-all solution. The decision boils down to taxes: whether it’s better to pay taxes now or later. High-income individuals in a top tax bracket today often lean toward traditional 401(k) contributions for the immediate tax break. However, if you expect to be in a similar or higher tax bracket in retirement (or worry tax rates will rise), using a Roth 401(k) becomes very attractive.

In simple terms, a Roth 401(k) is generally worth it if you believe your current tax rate is low compared to what you’ll face in the future. If your current rate is extremely high and you expect a much lower rate in retirement, sticking with pre-tax (traditional) contributions could save you more. Many experts actually recommend a mix – contributing some money to Roth and some to traditional – as a hedge. This way, you build a tax-free nest egg without giving up all your current tax benefits.

Bottom line: High earners should consider a Roth 401(k) if they want tax-free income later and can handle paying taxes now. If you’re unsure, doing both types of contributions provides tax diversification. Next, we’ll break down exactly how Roth 401(k)s work and what factors matter most for wealthy investors.

Roth vs. Traditional 401(k): Key Differences for High Earners

It’s essential to understand how Roth 401(k) and traditional 401(k) accounts differ. Both are workplace retirement plans under section 401(k) of the tax code, but they have opposite tax treatments:

• Traditional 401(k): Contributions are made pre-tax. This means every dollar you put in reduces your taxable income today. Your money grows tax-deferred (you don’t pay taxes on investment gains each year). However, when you withdraw funds in retirement, those withdrawals are taxed as ordinary income.
• Roth 401(k): Contributions are made after-tax. You pay income tax on your contributions now, with no immediate tax break. The payoff comes later: your money grows tax-free, and qualified withdrawals in retirement are completely tax-free (you already paid the taxes upfront).

In other words, a traditional 401(k) gives you a tax benefit now and taxes you later, while a Roth 401(k) demands taxes now in exchange for tax-free money later. Aside from the timing of taxes, these accounts share many similarities (same contribution limits, investment options, etc.) but also have some unique rules. The table below summarizes the key differences important to high earners:

Note: If you’re still working past RMD age and not a 5% owner of the company, you can delay RMDs from a current employer’s 401(k).

Notice that both Roth and traditional 401(k)s let your investments grow without yearly taxes – the critical difference is when you pay taxes. High earners contributing to a Roth 401(k) are essentially pre-paying taxes on their retirement savings. This can be advantageous if your current tax rate is reasonable and you foresee either a higher future tax rate or significant investment growth. By paying taxes now on contributions, you effectively “lock in” today’s tax rates on that money.

On the other hand, traditional 401(k) contributions give immediate relief on your tax bill – a big help if you’re in the top tax brackets. For a high earner, contributing pre-tax might save 32%–37% in federal tax on each dollar (plus state tax) today. That can free up cash flow or let you invest those tax savings elsewhere. The trade-off is that all withdrawals from the traditional 401(k) will be taxed later, possibly at a lower rate, but that depends on your retirement income and future tax law changes.

Crucially, contributing the maximum to a Roth 401(k) means you’re putting aside more after-tax money than if you maxed a traditional 401(k). For example, if you contribute the $22,500 annual limit as Roth, you pay taxes on that money now but get the full $22,500 working for you tax-free. If you put $22,500 in a traditional 401(k), you get a tax deduction now, but down the road Uncle Sam will take a cut of those funds when withdrawn. For those who can afford to max out their contributions, the Roth 401(k) allows a larger effective investment (since the tax is paid upfront). This is a subtle but important point for high-income savers aiming to build the biggest possible nest egg.

In summary, a Roth 401(k) and a traditional 401(k) are mirror opposites in tax timing. High earners should weigh the value of a tax break today versus tax-free income tomorrow. Next, we’ll dive into how to decide which one saves you more in the long run by examining tax brackets and future projections.

Why Future Tax Brackets Matter: The Now vs. Later Tax Dilemma

The single biggest factor in the Roth vs. traditional decision is your tax bracket now versus your expected tax bracket in retirement. The conventional rule of thumb is straightforward:

• If you expect to be in a lower tax bracket when you retire, a traditional 401(k) is usually more beneficial (take the deduction now, pay lower taxes later).
• If you expect to be in the same or a higher tax bracket in retirement, a Roth 401(k) likely yields the better outcome (pay taxes now at a lower rate, then enjoy tax-free withdrawals later).

This rule holds because of how the math works out. To see it in action, let’s look at a simple example. Imagine you contribute $100 to a retirement account today, and it doubles to $200 by the time you retire. We’ll compare the after-tax amount you’d end up with using a traditional 401(k) vs. a Roth 401(k) under different tax scenarios:

Assuming a $100 pre-tax contribution doubles to $200 by retirement. Traditional 401(k) is taxed on withdrawal; Roth 401(k) is taxed upfront on the $100 contribution.

As the table shows, when your future tax rate will be lower than today’s, the traditional 401(k) comes out ahead. When your future tax rate will be higher, the Roth 401(k) gives you more after-tax money. If tax rates are identical, both options net you the same result in theory (assuming you invest any tax savings from a traditional contribution).

Of course, in real life it’s hard to know for sure what your future tax rate will be. High earners often assume they’ll be in a lower bracket later because they’ll stop drawing a big salary in retirement. However, there are a few caveats:

• Required Minimum Distributions (RMDs) can keep your retirement taxable income high. If you accumulate a very large 401(k) balance pre-tax, you’ll be forced to withdraw a percentage each year after age 73. Those RMDs could be hefty enough to push you into a high tax bracket even without a salary. (For example, a $2 million traditional 401(k) at age 75 might have a required distribution around $80,000+ for the year – all of it taxable.)
• Tax law changes: Today’s tax rates are relatively low by historical standards, in part due to the 2017 tax cuts. These cuts expire after 2025, which could raise tax rates in the future. Many economists also project that taxes may increase in coming decades to address government debt. If you’re worried about future tax hikes, a Roth shields you by locking in your tax payment now.
• Your retirement lifestyle: If you expect a very comfortable retirement with multiple income sources (rental income, investments, pensions), you might not drop as much in tax bracket as you think. A high earner who saves diligently could end up with substantial taxable income streams in retirement.
• State taxes: Don’t forget state income taxes. If you live in a high-tax state now but plan to retire in a no-tax state (or vice versa), that will affect the equation. (We’ll cover state nuances in a dedicated section below.)

The key takeaway is to make an educated guess about your future tax situation. If you’re early in your career or think your income (and tax bracket) will only go up, leaning Roth can make sense – you pay relatively low taxes now on contributions, and avoid potentially higher taxes later. If you’re at your peak earnings and plan to scale down in retirement, the traditional route may deliver more bang for your buck.

A mix-and-match approach is also common. Many high earners split contributions between Roth and traditional to hedge their bets. This provides some tax relief now and some tax-free money later, diversifying your “tax risk” similar to how you diversify investments. Next, we’ll look at the important rules and recent law changes that specifically impact high earners considering Roth 401(k) contributions.

Federal Rules and Recent Law Changes High Earners Should Know

Navigating the Roth 401(k) as a high earner also means understanding key federal rules and recent changes in legislation. Here are the most important points:

• Contribution Limits: The annual limit for employee 401(k) contributions is the same whether Roth or traditional. You can split between them, but the combined total can’t exceed the limit (for example, $22,500 in 2023, which rose to $23,000 in 2024; plus an extra $7,500 “catch-up” if you’re 50 or older). High earners often have the means to max this out. Keep in mind, this limit is much higher than the Roth IRA limit (around $6,500), which is one reason the Roth 401(k) is so valuable for high-income individuals.
• No Income Limits to Contribute: Unlike a Roth IRA, a Roth 401(k) has no income restrictions. Even if you earn $500,000 a year, you’re allowed to contribute to a Roth 401(k) if your employer offers one. Many high earners who can’t contribute to a Roth IRA due to income phase-outs use the Roth 401(k) as their primary way to get tax-free retirement savings.
• Employer Match & Contributions: Employers can match your contributions or contribute profit-sharing into your 401(k). Traditionally, all employer contributions go into the pre-tax bucket (even if your own contributions are Roth). This means even Roth 401(k) users often end up with a mix of Roth and traditional money in the plan. A new rule, however, allows employers to offer matching contributions to the Roth side if the employee elects – but those match amounts would be treated as taxable income to you in the year they’re given. Not all companies have implemented Roth matching yet; either way, always contribute enough to get the full match (it’s free money!).
• Required Minimum Distributions (RMDs): In a significant win for Roth savers, Congress eliminated RMDs for Roth 401(k) accounts starting in 2024. Previously, Roth 401(k)s had a quirk: you were required to start taking distributions at age 72 (recently 73) just like a traditional 401(k), even though the withdrawals are tax-free. Now, thanks to a 2022 law change, Roth 401(k)s no longer force withdrawals during your lifetime, aligning them with Roth IRAs (which never required RMDs for the original owner). Practically, you can let your Roth 401(k) money grow untouched as long as you live, if you don’t need it, and even roll it into a Roth IRA at retirement without worrying about RMD rules.
• Catch-Up Contributions Must Be Roth for High Earners: Starting in 2026, if you’re a high earner age 50 or above, any catch-up contributions you make will have to go into the Roth 401(k) portion. “High earner” in this context means your wages exceeded $145,000 in the previous year (this threshold will adjust for inflation). Originally, this rule was set to begin in 2024, but implementation was delayed to 2026 to give employers time to update plans. Bottom line: if you’re 50+ and well-paid, that extra $7,500 (or more) catch-up won’t be tax-deductible – it’ll be Roth only.
• Overall 401(k) Limits: While the employee deferral is capped around $22k, the total contributions to your 401(k) (including employer match, profit sharing, and any after-tax contributions) can be much higher – $66,000 for 2023, for example (or $73,500 if you include the age-50 catch-up). This matters for high earners interested in mega backdoor Roth strategies, which we’ll discuss later. It’s good to know that the 401(k) has an overall annual ceiling per person.
• Rollovers and Conversions: Federal rules allow you to roll your Roth 401(k) into a Roth IRA if you leave your job (or even in-plan Roth rollovers if your plan permits). There’s no income tax on a direct Roth 401(k) to Roth IRA rollover (since it’s already after-tax money). High earners commonly roll over to a Roth IRA when changing jobs to consolidate accounts and ensure no RMDs. Additionally, some plans let you convert existing traditional 401(k) balances to Roth within the plan (you’d pay taxes on the converted amount). This can be a tactic to gradually move pre-tax assets into Roth, perhaps in years when your income (and tax rate) dips.

Historical note: Roth retirement accounts are named after the late Senator William Roth of Delaware, who championed the idea of tax-free retirement accounts. Roth IRAs began in 1998, and the Roth 401(k) arrived in 2006 after a change in federal law – giving high earners a workplace Roth option for the first time. Today, the majority of employer plans offer a Roth 401(k) feature, reflecting its growing importance. Lawmakers continue to tweak these rules (as seen with SECURE 2.0), often nudging savers toward Roth features – so it’s wise to stay informed.

Understanding these federal rules will help you make an informed choice and avoid any unpleasant surprises (like assuming you can do a catch-up pre-tax when you cannot). Now, let’s consider state tax implications – because where you live and retire can also influence the Roth vs. traditional equation.

State Tax Considerations: Where You Live (and Retire) Matters

Federal taxes aren’t the only taxes to think about – state income taxes can significantly impact your Roth vs. traditional strategy. High earners often live in states with steep income taxes (like California, New York, New Jersey), but some plan to retire in states with low or no income tax (think Florida, Texas, Nevada). The general principle is similar to the federal one: if you can avoid a higher tax now and pay a lower tax later (or none at all), that’s advantageous.

• High-Tax State Now, Low/No-Tax State Later: This scenario favors traditional 401(k) contributions even more strongly. By contributing pre-tax, you dodge the hefty state tax today on that portion of income, and if you retire somewhere with little or no state tax, you won’t pay state taxes on withdrawal either. Essentially, you get to completely escape the high state tax on those dollars.
  Example: Alice lives and works in California (with a top state tax rate around 13%) and plans to retire in Florida (0% state income tax). If Alice contributes to a traditional 401(k), she avoids California tax on her contributions now (saving up to 13% on those dollars), and in retirement, Florida won’t tax her withdrawals at all. She’ll never pay a cent of state tax on the money. Had she used the Roth 401(k), she would pay California’s 13% tax on her contributions now, only to have tax-free withdrawals in Florida – a bad trade-off, since Florida wouldn’t have taxed her anyway. In her case, the traditional 401(k) provides a big state-tax advantage.

• Low/No-Tax State Now, High-Tax State Later: This scenario tilts toward the Roth 401(k). If you’re currently in a state with no income tax but might move to a high-tax state in retirement, using Roth now can preempt a future state tax hit.
  Example: Bob lives in Texas (no state income tax) during his working years, but plans to retire in California. If Bob uses a Roth 401(k), he pays no state tax on contributions (Texas has none) and will pay no state tax on qualified withdrawals in retirement (California won’t tax Roth withdrawals since they’re not part of taxable income). If he used a traditional 401(k) instead, he’d get no state tax benefit upfront (there’s no tax to save in Texas) but would owe California income tax on every withdrawal in retirement. For Bob, Roth 401(k) clearly wins on the state tax front by shielding his retirement income from California’s tax.

• Same State with Steady Tax Rate: If you expect to live in the same state now and in retirement, state taxes won’t change geographically, but consider that your income level (and thus state tax bracket) may drop in retirement. For instance, a New York City high earner might pay high combined state/city taxes now, and if they retire in New York with a lower income, they could be in a lower state tax bracket. In this case, it’s analogous to the federal situation: traditional 401(k) saves state tax at the high rate now, and withdrawals might be taxed at a lower state rate later. Conversely, if you anticipate your state income tax rate in retirement could be equal or higher (or if your state has a flat tax rate regardless of income), the Roth holds more appeal for the state portion as well.

• States That Exempt Retirement Income: A few states either have no income tax (Florida, Texas, Nevada, Washington, etc.) or give retirees a break by not taxing certain retirement income. For example, Pennsylvania and Illinois generally do not tax distributions from 401(k)s or IRAs for residents above a certain age. If you’re planning to retire in one of these tax-friendly states, a traditional 401(k) withdrawal might incur little to no state tax, even if you had a tax bite during your working years. Knowing your state’s rules is important — it might reduce the effective tax difference between Roth and traditional.

Most states follow the federal treatment of Roth and traditional withdrawals: Qualified Roth 401(k) distributions are tax-free and usually aren’t counted as taxable income at the state level either, whereas traditional 401(k) withdrawals are generally treated as taxable income by states. So, the Roth vs. traditional debate at the state tax level is mainly about when and where you pay the tax. High earners should consider whether they might move and how state tax rates compare. For example, moving from a high-tax state to a low-tax state amplifies the benefit of traditional contributions (and the reverse scenario makes Roth more advantageous).

In summary, don’t forget to factor in state (and even local) taxes in your analysis; the difference can be substantial – potentially a swing of 10% or more, as seen in the examples above. Tailor your 401(k) strategy to where you earn and where you’ll retire. Next, we’ll explore advanced strategies high earners use to get even more out of Roth accounts.

Advanced Roth Strategies for High Earners

Even after maxing out a Roth 401(k), high earners have additional ways to funnel more money into tax-free growth. Two popular tactics are the “backdoor” Roth IRA and the “mega backdoor” Roth 401(k). These strategies aren’t about whether to choose Roth or traditional, but rather about how to get more into Roth accounts despite limits or restrictions.

The Backdoor Roth IRA (For When You Earn Too Much for a Normal Roth IRA)

The backdoor Roth IRA is a legal workaround that high-income individuals use to contribute to a Roth IRA even if their income exceeds the IRS limits. Normally, direct Roth IRA contributions are not allowed if your income is above a certain threshold (in the low $200,000s for a married couple, for example). But there’s no income limit on non-deductible Traditional IRA contributions or on Roth conversions. The strategy goes like this:

1. Contribute to a Traditional IRA (non-deductible). A high earner first puts money (up to the IRA limit, say $6,500 for 2023, or $7,500 if age 50+) into a traditional IRA. Because of the income level, this contribution is non-deductible – meaning it doesn’t reduce your taxable income. Essentially, you’re putting in after-tax dollars (similar to Roth in that sense, except the earnings in the Traditional IRA will be taxable eventually).
2. Convert the Traditional IRA to a Roth IRA. Soon after (often immediately), you convert that IRA contribution into a Roth IRA. Since the contribution was after-tax, you typically only owe tax on any gains that occurred in the short time the money was in the Traditional IRA – which is why people convert promptly to avoid even those small gains.
3. Result: That money is now in a Roth IRA, growing tax-free forever, just as if you were allowed a direct Roth contribution in the first place.

This “back door” entry to a Roth IRA effectively bypasses the income limit. High earners use it every year to sock away an extra ~$6k-$7k into Roth accounts on top of their 401(k) savings. One caveat is the pro-rata rule: if you have other pre-tax money in Traditional IRAs, the IRS will treat part of the conversion as taxable. Many high earners avoid this by keeping all their pre-tax retirement funds in 401(k)s (which aren’t counted in the IRA pro-rata calculation) or by rolling any IRA balances into a 401(k) before doing a backdoor Roth. It’s wise to consult a tax advisor or do careful research if you have existing IRA funds before executing a backdoor Roth.

Congress has considered closing this loophole in the past, but as of now it remains available and widely used by high-income savers.

The Mega Backdoor Roth 401(k) (Supercharging Your Roth Savings)

The “mega backdoor” Roth is a strategy to put far more money into a Roth account through your 401(k) plan than the normal annual deferral limit. In 2023, the total limit for contributions to a 401(k) plan (employee + employer + after-tax) is $66,000 (higher for those 50+). Your standard $22,500 deferral (Roth or traditional) counts toward that $66,000. If your employer match is say $10,000, that brings your total contributions to $32,500 so far. The mega backdoor strategy is about filling the remaining space (up to that $66k limit) with after-tax contributions and converting them to Roth.

Here’s how it works if your plan allows it:

• After-Tax Contributions: Some 401(k) plans permit after-tax employee contributions beyond the regular $22,500 limit. These are not Roth contributions, but rather contributions on which you pay tax now (like Roth) without getting a deduction. They go into a separate after-tax sub-account in your 401(k). The key difference is that unlike Roth contributions, the earnings on this after-tax sub-account are not tax-free until you convert them.
• In-Plan Roth Conversion or Rollover: The goal is to convert those after-tax contributions into Roth dollars. Many plans will allow an in-plan Roth conversion of after-tax funds. Some even automate this process (each paycheck’s after-tax contributions get swept into the Roth 401(k) portion immediately). If your plan doesn’t allow in-plan conversions, it might allow periodic in-service withdrawals of after-tax funds, which you can then roll over into a Roth IRA.
• Mega Amounts into Roth: By doing this, a high earner can potentially put tens of thousands of extra dollars into Roth each year. For example, if you maxed your normal $22,500 and got employer contributions, you might still have, say, $30,000 of space left under the limit. You could contribute that $30,000 as after-tax in the 401(k) and then convert it to Roth. That $30k now grows tax-free like a Roth, on top of your regular contributions.
• Tax Considerations: The after-tax contributions themselves don’t trigger additional tax on conversion (since you already paid tax on that money). However, any earnings that accrued on them before conversion would be taxable when converted. That’s why the strategy works best if conversions are done frequently (to minimize earnings in the after-tax account) – ideally immediately, or at least annually. After conversion, those dollars and their future earnings sit in your Roth 401(k) or Roth IRA and won’t be taxed again.
• Plan Availability: Not all 401(k) plans allow after-tax contributions or in-service rollovers. This is a somewhat advanced feature typically found in larger companies’ plans or tech/finance firms with generous savings options. Check your plan documents or ask HR if “after-tax contributions” (not to be confused with Roth contributions) are permitted. If they are, and you have the financial ability to save more after maxing your 401(k), the mega backdoor Roth can be a game-changer for building tax-free retirement wealth.

Both the backdoor Roth IRA and mega backdoor Roth 401(k) are ways to maximize your tax-free savings once you’ve taken care of the basics. They don’t change the fundamental decision of Roth vs. traditional for your core contributions, but they leverage rules to your advantage. High earners aiming to super-charge their retirement savings often use these strategies to supplement their 401(k) contributions with additional Roth money. Just be sure to follow the rules carefully and, when in doubt, get professional advice, since missteps (like leaving after-tax money unconverted, or triggering taxes via the pro-rata rule) can reduce the benefits.

Pros and Cons of Using a Roth 401(k) as a High Earner

It’s helpful to weigh the benefits and drawbacks side by side. Here’s a quick summary of the pros and cons for high-income individuals considering Roth 401(k) contributions:

Note: Roth 401(k) withdrawals are tax-free and won’t increase your taxable income in retirement. This can help you avoid things like higher Medicare premiums or Social Security benefit taxation that kick in at certain income levels. In contrast, large traditional 401(k) withdrawals do count as income and can trigger those costs.

As you can see, the decision involves trade-offs. The importance of each pro or con will depend on your individual situation – your current and expected future tax rates, your cash flow needs, estate plans, and even state of residence. Next, we’ll walk through a couple of real-world scenarios to illustrate when a Roth 401(k) pays off for a high earner and when it might not.

Real-World Scenarios: When a Roth 401(k) Shines and When It Falls Short

Sometimes it helps to see how these factors play out for an individual. Let’s look at two contrasting high-earner scenarios:

Scenario 1: 60-Year-Old Executive at Peak Income (Traditional 401(k) Advantage)

Profile: Elena is 60, in a high-paying executive role. She’s in the 37% federal tax bracket (and also pays state income tax). She plans to retire at 65. By then, her house will be paid off and she’ll mainly live on Social Security and withdrawals from her 401(k) and savings. She expects her retirement income will place her in roughly the 24% tax bracket (significantly lower than now).

Analysis: For Elena, each $1 she contributes to a traditional 401(k) saves her 37¢ in tax now, and when she withdraws that $1 in retirement, she expects to pay only ~24¢ in tax. In essence, she’s deferring tax at 37% now and later paying 24%, which is a clear win. The five years until retirement isn’t very long, so decades of Roth tax-free growth are less impactful for her. She’s more concerned with tax-rate arbitrage – taking deductions now at her high rate and paying taxes later at a lower rate.

Elena decides to stick mostly with traditional 401(k) contributions. This maximizes her tax break now when her tax rate is highest, and the money will still grow tax-deferred for her retirement. By choosing traditional, she also keeps more take-home pay (helpful since she’s funding her daughter’s grad school). Overall, in her case, the traditional 401(k) clearly comes out ahead.

She might still allocate a small portion to Roth (say 20% Roth, 80% traditional) just for diversification – in case tax rates do rise sharply or to leave some tax-free money to her heirs. But since she anticipates a much lower bracket later, she keeps her Roth portion minimal.

Scenario 2: 35-Year-Old Professional with a Rising Career (Roth 401(k) Advantage)

Profile: Jason is 35 and earning a $200,000 salary in a tech job, putting him in the 32% federal tax bracket. He expects his income (and tax bracket) to rise over time, and he’s aware that today’s relatively low tax rates expire in 2026 – meaning taxes could be higher by the time he retires. With roughly 30 years until retirement, he has a long runway for his investments to grow. (He currently lives in a no-income-tax state, but isn’t sure where he’ll retire.)

Analysis: For Jason, paying a 32% tax now is an investment in avoiding potentially higher taxes later. He suspects that between future tax increases and his own growing wealth, it’s wise to lock in today’s rate. Additionally, with decades of growth ahead, money in a Roth 401(k) could multiply several times over – and all that growth would be tax-free at withdrawal.

By contributing to a Roth 401(k), Jason forgoes the immediate tax deduction but ensures he won’t owe taxes on his withdrawals in retirement. If future tax rates are higher, he’ll be glad he paid at 32% now. Even if they stay the same, he’ll retire with a huge pot of tax-free money, giving him lots of flexibility. He also knows the Roth 401(k) has no income limit – unlike a Roth IRA that he’s barred from – so it’s his main way to build Roth savings.

For Jason, the Roth 401(k) contributions make sense. He’s young, in a moderate-high tax bracket now but possibly a higher one later, and he values the predictability of tax-free money in retirement. The immediate tax hit is acceptable to him; he budgets around the lower take-home pay. In exchange, he’s building a sizable Roth balance that will be entirely his in retirement, untouched by future tax bills.

In summary, if you’re in peak earning years and expect a much lower tax bracket in retirement, the traditional 401(k) likely delivers more benefit. If you’re younger or suspect your future tax rates could be the same or higher (or you have a long time for investments to grow), the Roth 401(k) tends to come out ahead. Many high earners fall somewhere in between and aren’t entirely sure what the future holds. In that case, splitting contributions between Roth and traditional is a reasonable strategy – giving you some tax savings now and some tax-free money later. There’s no one-size-fits-all answer, but understanding these principles lets you tailor the choice to your situation.

FAQ

Q: Is a Roth 401(k) really worth it for high earners?
A: It depends on your future tax outlook. If you expect similar or higher tax rates later, a Roth 401(k) is beneficial; if a much lower bracket in retirement, traditional may save more.

Q: Can high-income earners contribute to a Roth 401(k)?
A: Yes. Roth 401(k)s have no income limits, so even very high earners can contribute (unlike Roth IRAs which phase out at high incomes). You just need an employer plan that offers a Roth option.

Q: Should I split my 401(k) contributions between Roth and traditional?
A: If you’re unsure about future taxes, splitting contributions is a smart hedge. It gives you some tax savings now (traditional) and some tax-free money later (Roth), balancing the benefits.

Q: What is the 5-year rule for Roth 401(k)?
A: You must wait 5 years from your first Roth 401(k) contribution (and be over 59½) before earnings can be withdrawn tax-free. This “5-year rule” ensures only qualified withdrawals are completely tax-free.

Q: Do Roth 401(k)s have required minimum distributions?
A: Not anymore. As of 2024, Roth 401(k)s have no required minimum distributions during the original owner’s lifetime. (Previously they did, but a recent law change eliminated RMDs for Roth 401(k) accounts.)

Q: Can I convert my traditional 401(k) to a Roth 401(k)?
A: Some plans allow in-plan Roth conversions. You can convert part of your traditional 401(k) to Roth, but you’ll owe income tax on the amount converted. Check if your employer plan permits this.

Q: Are employer matches contributed to Roth as well?
A: Usually not. Employer matching contributions go into a pre-tax account (taxed at withdrawal), even if your contributions are Roth. New rules allow Roth employer matches, but those are taxable to you immediately.

Q: How do state taxes factor into Roth vs. traditional?
A: If you’ll move from a high-tax state to a low-tax state in retirement, traditional contributions can save more (avoiding current state tax). If the reverse is true, Roth contributions become more attractive.

Q: What’s the difference between a Roth 401(k) and a Roth IRA for high earners?
A: Primarily the contribution rules. A Roth 401(k) has no income limits and a much higher contribution limit (over $20k). Roth IRAs have lower limits and phase out for high incomes (without a backdoor conversion).

Q: Can I contribute to a Roth 401(k) and a backdoor Roth IRA in the same year?
A: Yes. The 401(k) and IRA limits are separate. You can max out a Roth 401(k) through your employer and also perform a backdoor Roth IRA to contribute additional funds to a Roth.