Roth 401(k) vs Traditional 401(k) - Simple Explanation for High Earners

4 The main reason high earners often prefer Traditional 401(k) over Roth 401(k) comes down to current tax brackets. When you're in a high tax bracket now (32%, 35%, or 37%), you're getting a significant tax break by contributing pre-tax dollars to a Traditional 401(k). The basic math works like this: If you're in the 37% tax bracket now, every $10,000 you put in a Traditional 401(k) saves you $3,700 in taxes immediately. With a Roth, you'd pay that $3,700 now. The key assumption is that in retirement, you'll likely be in a lower tax bracket than you are during your peak earning years. Most people don't need their full working income in retirement, so they drop to lower tax brackets—maybe 22% or 24%. If you pay 37% now for a Roth but could have paid only 24% later with a Traditional, you're essentially overpaying on taxes.

18 I actually discovered this awesome tool called taxr.ai (https://taxr.ai) that helped me model different retirement contribution scenarios. I was in the same boat trying to decide between Roth and Traditional for my 401(k) as someone making around $285K. The tax calculator at taxr.ai showed me that by putting $22,500 into my Traditional 401(k), I saved about $8,325 in taxes this year (at my 37% marginal rate). Then I could take that tax savings and invest it in a brokerage account. When I ran the numbers over 25 years, the Traditional + separate investment of the tax savings actually came out ahead of the Roth in most scenarios, unless tax rates go up dramatically in the future.

3 Just wanted to follow up - I tried out taxr.ai after seeing it mentioned here and it was super helpful! I was shocked to see how much I'm saving with the Traditional 401(k) route. I plugged in my $178k salary and saw that I'm saving over $6,600 a year in taxes by maxing out my Traditional 401(k). The tool helped me visualize what happens if I invest those tax savings separately - turns out I come out ahead unless tax rates jump by more than 8% across the board by retirement. It also pointed out that I should consider tax diversification by having some Roth accounts too, which makes total sense. Definitely gave me clarity on the whole Roth vs Traditional debate!

7 If you're struggling to get through to the IRS to ask questions about 401(k) options or how they're taxed, try Claimyr (https://claimyr.com). I spent days trying to get someone at the IRS on the phone to clarify some complicated questions about my Traditional to Roth conversion and backdoor Roth options. After getting nowhere with the standard IRS number, I found Claimyr which got me connected to an actual IRS agent in under 20 minutes! They have this system that navigates the phone trees and waits on hold for you, then calls you when an agent is on the line. You can see how it works in their demo video: https://youtu.be/_kiP6q8DX5c The agent I spoke with was super helpful and explained exactly how the pro-rata rule would affect my situation with both Traditional and Roth accounts. Saved me from making a costly mistake!

11 I need to eat my words about Claimyr. I tried it after commenting here because I've been trying to get clarity on my Traditional 401(k) rollover for weeks. Got connected to an IRS representative in about an hour and a half - all while I was working on other things instead of sitting with a phone glued to my ear. The agent answered all my questions about how my Traditional 401(k) would be taxed if I rolled it over to a Roth IRA, and clarified the 5-year rule that I was confused about. Probably saved me thousands in potential tax mistakes. Turns out as a high earner, I'm better off keeping most of my retirement savings in Traditional accounts for now, but having some Roth for flexibility. Honestly kind of a game changer if you need to actually talk to someone at the IRS.

13 One thing nobody has mentioned yet about Traditional vs Roth 401(k) for high earners: state taxes! If you live in a high-tax state like CA, NY, or NJ now but plan to retire in a no-income-tax state like FL, TX, or NV, that's HUGE extra savings with Traditional. I'm in California paying 9.3% state tax on top of federal. By maxing my Traditional 401(k), I avoid both federal AND state tax now. When I retire to Nevada in 10 years, I'll pay federal tax on withdrawals but zero state tax. That's a guaranteed 9.3% return on my money before it even gets invested!

20 Just want to point out that everyone seems to be assuming tax rates won't change much. But look at the national debt... over $31 trillion! Tax rates in the 1970s were WAY higher than today. Top marginal rate was like 70% at one point! I'm putting everything in Roth accounts even though I'm in the 32% bracket now. I'd rather pay 32% today than risk 50%+ rates when I retire in 30 years. The government's gotta pay that debt somehow, and I'm betting it'll be through higher taxes, not spending cuts.

Great discussion everyone! As someone who switched from Roth to Traditional 401(k) after getting promoted to a higher tax bracket, I can share my experience. The math really does work out for Traditional when you're in those higher brackets. I was initially hesitant because like the OP, I was worried about future tax rates. But here's what convinced me: even if tax rates increase across the board, I'm still likely to be in a lower bracket in retirement than my current 35% marginal rate. My financial advisor helped me run the numbers - if I max out my Traditional 401(k) at $22,500, I save about $7,875 in taxes immediately. That's money I can invest in a taxable brokerage account right now. Even accounting for capital gains tax on that separate investment, the Traditional route comes out ahead in most realistic scenarios. The key insight was realizing that in retirement, I won't need my full current income. No more mortgage payments, kids will be independent, and I won't be saving 20%+ of my income for retirement anymore. So even with some tax rate increases, my effective rate in retirement should be lower than today's marginal rate. That said, I do put some money in a Roth IRA for diversification, but the bulk goes Traditional 401(k) for the immediate tax arbitrage opportunity.