401(k) vs Roth 401(k): Which Is Better for High Earners?
TLDR
The traditional 401k vs Roth 401k decision comes down to whether your tax rate will be higher now or in retirement. High earners in the 32-37% bracket today who expect to be in a lower bracket in retirement lean toward traditional pre-tax contributions. But Roth 401k has real advantages that complicate this analysis: no Required Minimum Distributions starting in 2024, tax diversification, and estate planning flexibility. Many high earners benefit from splitting contributions between both.
- Traditional 401k
- Contributions reduce taxable income in the year made — a 37% bracket earner saves $370 in current taxes for every $1,000 contributed. The money grows tax-deferred and is taxed as ordinary income when withdrawn in retirement. Required Minimum Distributions apply starting at age 73.
DEFINITION
- Roth 401k
- Contributions are made with after-tax dollars — no current-year tax deduction. But growth and qualified withdrawals are entirely tax-free. Unlike Roth IRAs, Roth 401ks historically required RMDs, but the SECURE 2.0 Act (effective 2024) eliminated RMDs for Roth 401ks, aligning them with Roth IRAs.
DEFINITION
- Required Minimum Distribution (RMD)
- Mandatory annual withdrawals from traditional IRAs and 401ks starting at age 73, calculated based on account balance and IRS life expectancy tables. RMDs are taxed as ordinary income. Large pre-tax balances can produce substantial taxable income in retirement, potentially pushing retirees into high brackets even if they don't need the money.
DEFINITION
The Question Behind the Question
“Traditional or Roth 401k?” is really the question: “Will my tax rate be higher today or in retirement?”
If your rate is higher today: traditional 401k saves more in taxes (you defer at your current high rate and pay at a lower rate in retirement).
If your rate will be higher in retirement: Roth 401k is better (you pay at your current lower rate and never pay again).
For most high earners in the 32-37% bracket, today’s rate is likely higher than the effective rate they’ll face in retirement — making the traditional 401k the default recommended choice. But several factors complicate this.
The Case for Roth Even at High Income
Unknown future tax rates: Current federal income tax rates aren’t permanent. The 2017 Tax Cuts and Jobs Act rates are scheduled to sunset in 2025 unless Congress acts. Higher future rates could flip the calculus entirely. Roth contributions lock in today’s known rate, hedging against rate risk.
RMD risk with large pre-tax balances: A high earner maximizing traditional 401k contributions for 30 years can accumulate $2-3M+ in pre-tax accounts. At 73, RMDs on that balance can generate $100,000-150,000 per year in forced taxable income — even if you don’t need the money. This can push retirees into high brackets, trigger Medicare surcharges (IRMAA), and reduce Social Security tax efficiency. Having Roth assets as a counterbalance gives you flexibility to manage taxable income in retirement.
Estate planning: Roth accounts inherited by non-spouse beneficiaries must be withdrawn within 10 years (under current law), but the withdrawals are tax-free. Pre-tax inherited accounts generate a significant tax bill for heirs. If legacy or estate planning is a consideration, Roth assets are more efficient to pass on.
The SECURE 2.0 RMD elimination: Starting in 2024, Roth 401ks no longer have required minimum distributions. This removes the previous Roth 401k disadvantage relative to Roth IRAs. Roth 401k money can now compound indefinitely if you don’t need it.
The Split Approach
Rather than choosing one or the other, many financial planners recommend splitting 401k contributions:
- Contribute enough pre-tax to bring taxable income down to the 32% bracket threshold
- Contribute additional amounts to Roth 401k for tax diversification
For example: at $250,000 W-2 income in 2025, the 37% bracket starts at $626,350 (single) and $751,600 (MFJ). Most high earners aren’t in the 37% bracket — they’re in 32%. In that case, the marginal rate difference between pre-tax and Roth is smaller, making the diversification argument for Roth contributions stronger.
What Thalvi Can Show You
The right decision depends on your specific numbers: current income, expected retirement spending, projected Social Security income, existing pre-tax vs Roth balance ratio, and state tax situation. Thalvi tracks your current account balances and types — so you can see your current Roth-to-pre-tax ratio and assess whether you’re building enough tax diversification across your accounts.
The goal isn’t to optimize a single year’s tax bill. It’s to have flexibility in retirement to manage income across pre-tax, Roth, and taxable sources in the most tax-efficient sequence.
Q&A
Should a high earner choose traditional or Roth 401k contributions?
The standard analysis: if your current marginal tax rate (32-37% for high earners) exceeds your expected effective tax rate in retirement, traditional pre-tax contributions save more in taxes. In retirement, with lower income and strategic withdrawals, many retirees fall into the 22-24% bracket. If that's the expectation, the pre-tax 401k produces a better outcome. But the analysis has complications: future tax rates are unknown, RMDs can create unexpected tax bills, and tax diversification (having both pre-tax and Roth balances) provides flexibility.
Q&A
What is tax diversification and why does it matter?
Tax diversification means holding assets in accounts with different tax treatments — some pre-tax (traditional 401k, traditional IRA), some Roth (Roth 401k, Roth IRA), some taxable. In retirement, this allows you to choose each year which accounts to draw from to minimize your total tax liability. If pre-tax RMDs are pushing you into a higher bracket, you can draw from Roth accounts to supplement income without adding to your taxable income. Having only pre-tax assets eliminates this flexibility.
Q&A
How does the SECURE 2.0 Act change the Roth 401k calculation?
The SECURE 2.0 Act (effective January 1, 2024) eliminated Required Minimum Distributions for Roth 401ks. Previously, Roth 401ks had RMDs like traditional 401ks, which was a disadvantage compared to Roth IRAs (which have no RMDs). Now, Roth 401ks and Roth IRAs are equivalent on this point. This makes the Roth 401k more attractive for people who want to let the money grow beyond age 73, estate planning flexibility, or who want to avoid adding to their taxable income in later retirement years.
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