Roth 401k: High Earner's Secret Backdoor to Tax-Free Money

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The Roth 401k: The Secret Backdoor Most High Earners Don't Know About

Today we are unpacking something called the Roth 401k. I am finding that most people do not even know it exists. They don't know what it is and they don't know what to ask their employer about it.

So we're going to unpack it now.

The Wall of Shame Refresher

For those of you who've spent any time in my office, you know that I jump up on my whiteboard and I draw this thing called the wall of shame. The wall of shame has three lines on it, which explains the taxation of different investment accounts.

The first line is something that I call the max tax line. So any dollars that you invest on that max tax line are going to be taxed at the highest tax rate possible, which includes 401k and IRA money. Now if you need a refresher on my wall of shame, there are three videos on my website that explain this in great detail.

The next line on the wall of shame sketch that I do is the tax-free line and that's typically what we refer to as the Roth IRA.

The High Earner Problem

So here's the deal: if you make as a single person over $153,000 or as a married couple making over $228,000, the IRS has decided that you are too rich to actually participate in the tax-free line. So you're locked out of Roth IRAs altogether.

But what you don't realize is that there's this thing called the Roth 401k and it is the backdoor that most high earners don't even know about and actually helps you build massive tax-free retirement accounts.

The Roth 401k Basics

Here are the basics: in 2025 you as an individual are capped at how much you can put into your 401k. It always cracks me up when people come in and they're like, "Oh Leanne, I am maxing out my 401k" and I'm always like, "Sorry, there's a better way." This is the better way.

The maximum that you can put into your 401k at work is $23,500 if you are under the age of 50. If you're over 50, you can do $31,000. So those are the key numbers.

Here's the huge deal: you can put all $23,500 or all $31,000 into your Roth side of your 401k.

Why This is Such a Big Deal

This is a huge deal because if you're just like a person walking into my office saying "I'd like to do a Roth IRA," I'm going to tell you the most you're allowed to put into it is $6,000 a year because the IRS doesn't want you to put so much money on the tax-free line.

So what I'm saying is all of your total contribution limit can go to the Roth side. The math would be that you can put either $23,500 on the max tax line so that you can get a piddly little tax deduction this year, or you could put all $23,500 in the after-tax but zero tax later line, which has huge potential.

Tax Rate Arbitrage Strategy

Let me explain. This strategy is tax rate arbitrage because you are likely in a high tax bracket now and very likely maybe in the same or higher tax bracket in retirement.

Then the other thing about this is that if you're somebody who makes a lot of money or the IRS is concerned, you are going to be appalled when RMDs happen to you—required minimum distributions. So unlike traditional 401ks or IRAs, there is no forced withdrawals on this money called RMDs at age 73 or 75.

Estate Planning Gold

Additionally, if you do this strategy, it is estate planning gold because this allows us to pass on tax-free wealth onto heirs instead of your heirs inheriting a large IRA or former 401k, which then they have only 10 years to distribute so they can pay full taxable income on.

Medicare Premium Benefits

Also, there's an implication about Medicare. So as you get older and have more gray hair and you go on Medicare, your tax-free withdrawals from a Roth 401k or Roth IRA don't increase your Medicare premiums in retirement. So it's a big deal and it's worth talking about.

How to Find Out if Your Employer Offers It

Here's how you find out if your employer offers it. You start by going and talking to your HR person and basically just say, "Hey, does our 401k offer Roth or Roth sleeve?"

Now, a lot of times the person there will say, "Are you talking about a Roth conversion?" You say, "No, not a Roth conversion. I want to know if it offers Roth contributions."

And then what you want to ask is, "Does the employer offer matching to the Roth?" Get those questions answered.

The Bottom Line

If the answer is yes to either or both of those things, you need to make an appointment with me and we'll do the planning and get things fixed for you.

This could be the difference between paying massive taxes in retirement or having a completely tax-free retirement income. For high earners who are locked out of Roth IRAs, this is your golden ticket to the tax-free line.