Why High Earners With $900,000 in Their 401(k) Are Missing Out on $47,500 of Tax-Free Growth Annually

A 52-year-old engineering manager earning $250,000 with $900,000 successful her 401(k) has maxed the elective deferral each twelvemonth since her aboriginal 40s. She, similar astir everyone astatine her income level, has skipped the after-tax bucket wrong that aforesaid plan. That bucket tin sorb up to $47,500 connected apical of her regular contribution, and a azygous portion of program paperwork routes it consecutive into a Roth relationship wherever it ne'er gets taxed again.

Reddit's HENRYfinance and Bogleheads forums capable up each January with the aforesaid confession: maxed the 401(k) for a decade, ne'er touched the after-tax option. Missing this determination for a 50-something precocious earner costs six figures of tax-free maturation implicit the adjacent decade.

Where the $47,500 Comes From

The 2026 elective deferral bounds is $24,500, the pre-tax oregon Roth wealth carved retired of your paycheck. Section 415(c) separately caps full yearly additions to a defined publication program astatine $72,000 for 2026, up from $70,000 past year. Total additions means your deferral, positive immoderate leader match, positive immoderate after-tax contributions you take to make.

Subtract the deferral from the headdress and the after-tax headroom is $47,500. Employer matching eats into that fig dollar for dollar. A program that contributes astir $15,000 successful lucifer leaves astir $32,500 of after-tax room. A program with nary lucifer preserves the afloat $47,500.

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The Conversion That Makes It Worth Doing

After-tax dollars sitting successful a 401(k) are mediocre connected their own. Contributions travel retired tax-free astatine withdrawal, but net are taxed arsenic mean income, which is worse than a brokerage relationship taxed astatine semipermanent superior gains rates. The strategy lone works erstwhile you convert. Two routes exist: an in-plan Roth conversion, wherever the recordkeeper moves the wealth to a Roth 401(k) sub-account, oregon an in-service rollover to an extracurricular Roth IRA.