One of the Most Overlooked Tax Strategies May Be Hiding in Your 401(k)

Interest rates and inflation have dominated financial conversations lately. Higher borrowing costs affect everything from mortgages to business financing, while elevated everyday expenses continue to put pressure on household budgets.

But there's another expense worth paying attention to—particularly for high earners:

Taxes.

Tax planning isn't simply something to think about when filing a return. The decisions you make throughout your career can determine how much of the wealth you're accumulating ultimately remains available to you. And one commonly overlooked opportunity may already be sitting inside your employer's retirement plan.

Are You Using the Roth Option in Your 401(k)?

For decades, workplace retirement savings largely meant making pre-tax contributions. Money went into a 401(k) before income taxes, potentially reducing taxable income today, and withdrawals would generally be taxed later in retirement.

Then came the Roth 401(k).

Although Roth IRAs have existed since the late 1990s, employers weren't permitted to offer designated Roth contributions within 401(k) and 403(b) plans until 2006.

That relatively recent history helps explain why some investors are familiar with the idea of a Roth IRA but have never seriously considered the Roth option available through their employer.

And for younger high earners, that distinction can matter.

A Roth IRA and Roth 401(k) Aren't the Same Opportunity

One of the biggest differences is simply how much you may be able to contribute.

For 2026, the IRA contribution limit is $7,500 for those under age 50. Meanwhile, the employee contribution limit for a 401(k) is $24,500.

Importantly, that $24,500 401(k) employee-deferral limit is shared between traditional and Roth contributions—you don't receive separate $24,500 limits for each.

Still, access to a Roth 401(k) can provide substantially more room for Roth savings than an IRA alone.

With a traditional 401(k), eligible contributions generally reduce taxable income today, while distributions are generally taxable later. Roth contributions work differently: you pay income taxes on the money today, but qualified distributions can generally be received tax-free later.

For someone who has decades of potential investment growth ahead, the difference in after-tax purchasing power can become significant.

But Should Every High Earner Choose Roth?

Not necessarily.

This is where tax planning becomes more nuanced than simply saying “Roth is better.”

Someone currently paying a relatively high marginal tax rate may benefit substantially from making pre-tax contributions today. Someone expecting considerably higher income later—or someone building a portfolio with very little tax diversification—may have a stronger argument for directing some retirement savings toward Roth.

And the answer doesn't necessarily have to be all or nothing.

Depending on the employer's plan, an investor may be able to divide contributions between traditional and Roth sources. That can create tax diversification: pools of retirement assets that will receive different tax treatment in the future.

The goal is to think about taxes across your financial lifetime—not simply minimize this year's tax bill.

High Income Doesn't Automatically Equal Tax Efficiency

This is particularly important for younger professionals whose incomes have increased quickly.

You may have started your career diligently contributing enough to receive the employer match. Then came promotions, bonuses, equity compensation and larger retirement contributions.

But did anyone ever revisit which type of contribution you're making?

It's surprisingly easy to increase a 401(k) contribution percentage year after year without reconsidering whether those dollars should be traditional, Roth or some combination of the two.

That's why benefits enrollment season can be a useful trigger for a broader financial review.

Before You Finish Your Benefits Elections, Check Your 401(k)

As you review your employer benefits, take a few minutes to look beyond your contribution percentage.

Ask yourself:

• Does my employer offer a Roth 401(k) option?

• Are my current contributions traditional, Roth or a combination?

• What marginal tax rate am I paying today?

• How much do I already have accumulated in pre-tax versus Roth accounts?

• How might my income and tax situation change throughout my career?

• Am I taking full advantage of the retirement savings opportunities available to me?

These questions don't necessarily have one universal answer. That's precisely why they're worth asking.

A retirement contribution election that made sense five years ago may not be the best fit for your financial situation today.

Think Beyond This Year's Tax Return

Good tax planning isn't simply about paying the least tax possible this April. It's about considering when you pay taxes, how much flexibility you'll have later, and how today's decisions affect the purchasing power of your future wealth.

Roth contributions are only one piece of that strategy. Taxable investments, charitable giving, capital-gains management, equity compensation, HSAs, retirement distributions and many other decisions can all play a role.

For clients, we examine these considerations as part of the comprehensive review process. But as benefits enrollment season approaches, there's one simple place to start:

Log into your employer's retirement plan and look at your contribution type—not just your contribution amount.

You may find that one of your most important tax-planning decisions has been sitting in your benefits portal all along.

This material is for educational purposes only and should not be considered individualized tax or investment advice. Tax treatment depends on individual circumstances. Consider consulting your tax and financial professionals regarding your specific situation.