Roth vs. Traditional 401(k) contributions; what’s the right choice for high-income earners?

In retirement planning, one thing is clear – when preparing for the future, there’s no one-size-fits-all solution. This especially applies to high-income earners, who often have more complex financial portfolios and other unique considerations to weigh.

For those fortunate enough to enjoy a high income, the stakes are higher, and the choices are more significant. At the heart of the retirement decision-making process is the choice between Roth and Traditional 401(k) savings accounts; two powerful tools that can shape your financial future in vastly different ways. 

In this blog, we will delve into both Roth and Traditional 401(k)s and explore the nuances high-income earners must consider when making this critical decision. In addition, we’ll highlight why retirement planning for this demographic can lead to a financially secure and fulfilling retirement.

Traditional 401(k)

A traditional 401(k) is a retirement savings account that allows workers to contribute a portion of their pre-tax salary into the account, which can be invested in various investment options that are pre-selected by the plan’s advisor. 

The money held in a 401(k) grows tax-deferred, meaning you don’t pay taxes on the contributions or the investment earnings until you withdraw the funds in retirement. 

Tax Treatment of Traditional 401(k) Contributions

One of the key advantages of a traditional 401(k) is that contributions are made with pre-tax dollars. This means that the money you contribute reduces your taxable income in the year you make the contributions. For example, if you earn $100,000 and contribute $10,000 to your traditional 401k during the year, you’ll be taxed on $90,000 of your income that year, barring any other pre-tax contributions, credits, and deductions.

Tax Treatment of 401(k) Investment Growth

Within a traditional 401(k), investments can grow tax-deferred. This means you won’t pay taxes on the capital gains, dividends, or interest income generated within the account each year. This tax deferral can lead to more significant long-term growth than a taxable investment account. 

Tax Treatment of 401(k) Withdrawals

Traditional 401(k) distributions are subject to income tax when you start taking withdrawals. This means the tax rate at which your withdrawals are taxed depends on your income and tax bracket during retirement.

Roth 401(k)

A Roth 401(k) is a retirement savings account that combines the features of a traditional 401(k) and a Roth Individual Retirement Account (IRA). They allow employees to contribute a portion of their salary into the account with after-tax dollars. This means you pay income tax on the money you contribute to a Roth 401(k) in the year you earn it, but retirement withdrawals are tax-free.

Tax Treatment of Roth 401(k) Contributions

When you contribute to a Roth 401(k), the money is taxed at your current income tax rate. This means you won’t receive an immediate tax deduction, unlike contributions to a traditional 401(k).

Tax Treatment of Roth 401(K) Investment Growth

One of the key advantages of a Roth 401(k) is that your investments can grow tax-free. This means you won’t owe capital gains tax or income tax on the earnings and capital appreciation within the account if you follow the withdrawal rules.

Tax Treatment of Roth 401(k) Withdrawals

In retirement, qualified withdrawals from a Roth 401(k) are tax-free. To be considered qualified, the withdrawal must occur after age 59 ½, and the account must have been open for at least five years. 

This can provide significant tax advantages during retirement, as you won’t have to worry about tax consequences on your distributions. 

Critical Considerations for High-Income Earners

Now that you have an understanding of both types of accounts, let’s compare each of their benefits that are specific to high-income earners. 

Traditional 401(K)

Roth 401(K)

Tax diversification: A traditional 401(k) can provide tax diversification when combined with other retirement accounts, like Roth IRAs and other taxable accounts. Diversifying the tax treatment of your retirement savings can give you more flexibility in managing your tax liability during retirement.



Tax diversification: High-income earners often find themselves in higher tax brackets. A Roth 401(k) account gives you more flexibility in managing your tax liability during retirement. Having a Roth account also allows you to be strategic about the tax treatment of your investment choices. For example, using the Roth to invest in high-growth stock funds while investing more conservatively in other accounts.

Tax-deferred growth: This is especially significant for high-earners making more substantial contributions and investments. Traditional 401(k)s allow your money to compound more efficiently, potentially leading to higher account balances over time.

Tax-free growth: Earnings within the account are not subject to capital gains tax, allowing your investments to grow and compound more efficiently.

Potential Lower tax rate in retirement: Some high-income earners may expect to be in a lower tax bracket during retirement. This means that making withdrawals in retirement (if you’re in a lower tax bracket) could result in overall tax savings.

No Required Minimum Distributions (RMDs): Unlike traditional 401(k)s, Roth 401(k)s are not subject to RMDs. This means you can allow your investments to grow tax-free for as long as you like and leave a tax-free inheritance to your heirs.


Withdrawal Flexibility: Roth 401(k)s allow you to control the timing and source of your withdrawals, allowing you to manage your tax liability during retirement strategically.

Immediate tax benefits: Contributing pre-tax dollars allows you to reduce your taxable income for the year.




Protection against tax increases: Given the uncertainties of future tax rates, contributing to a Roth 401(k) can be a hedge against potential tax rate increases. This can be especially beneficial for high-income earners who may be more exposed to future tax changes.

Estate planning: Although withdrawals are subject to income tax, your beneficiaries can inherit the account with the same tax-deferral benefits, which can be advantageous for a wealth transfer. They will be subject to RMDs and distributing the account in full within a 10-year window. 

Estate planning: Roth 401(k)s can provide a tax-advantaged way to leave assets to your heirs, as they can inherit the account tax-free and continue to benefit from tax-free growth during their 10-year distribution window. Inherited Roths are also subject to annual RMDs.

Income and Eligibility Limits

Like most financial matters, there are some limitations and rules to follow regarding traditional and Roth 401(k)s. 

First, let’s discuss traditional 401(k)s. They do not have an income limit on contributions. High-income earners can contribute the maximum amount allowed by the IRS, which is $22,500 in 2023 and will increase to $23,000 in 2024. In addition, any contributions made by individuals over 50 are allowed an additional “catch-up” limit of $7,500.

Roth 401(k)s also do not have income limits that restrict high-income earners from contributing. This means that regardless of your income, you can contribute to a Roth 401(k) if your employer offers the plan. The contribution limits for a Roth 401(k) are the same as traditional 401(k)s, with $22,500 as the limit for those under 50 and up to $30,000 if over 50 in 2023, increasing by an additional $500 in 2024.

Now, let’s walk through some specific strategies high-income earners can use to maximize their retirement savings contributions:

  • Take full advantage of employer match: Contribute at least up to the maximum of what your employer will match. Essentially, any match is free money, so contributing less than what your employer will match is potentially missing out on a large chunk of your retirement savings (for free!).
  • Utilize tax-advantaged IRAs: High-income earners can contribute to traditional IRAs, but the tax deductibility may be limited if an employer-sponsored plan also covers you. However, you can still contribute to a non-deductible traditional IRA and later convert it to a Roth IRA, a “backdoor Roth IRA.” You will be responsible for any income taxes incurred by the Roth conversion, but this will allow the converted amount to grow tax-free until distribution.

Retirement Goals and Timing

With all this being said, your retirement savings strategy largely depends on your retirement timeline and lifestyle goals. For example, if you want to retire before the normal retirement age (NRA), your strategy might look different than someone who is waiting.

Working with a financial advisor who understands your current tax situation and can make spending and tax projections throughout retirement can help you determine whether you’re most benefited by the tax-deferred growth of a traditional 401(k) or the tax-free growth of a Roth. While there is no way to be confident about what tax rates and brackets will be in the future, you can still make an educated decision based on the information you have today. 

For example, if you find that your tax rate now and in the future are expected to be relatively similar, you may still decide that Roths make sense simply to insure against the idea of increasing tax rates and brackets. In addition, your advisor can also help you determine the “break-even” tax rate in retirement, which would provide a mathematical advantage for one account type over the other.

Diversifying your account types can provide valuable withdrawal options that help keep you under certain tax thresholds beyond just income brackets. But, be sure to check in with your advisor before switching your contributions from one account to another because there are a variety of other considerations they can help you check. For example, double-checking your tax withholdings on your employment income. 

A great way to figure out what’s best for you is to discuss your ideal retirement with your financial advisor. They can help you create a strategy to meet your goals and needs. 

As high-income earners, you’ve worked hard to achieve financial success – your retirement should be no different. So, let’s embark on this journey together and discover the retirement savings strategy that can help you make the most of your retirement years. 

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