Roth 401(k) or Traditional 401(k)? How High-Income Parents Should Decide

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

For most two-earner families making $750,000 or more in California, the traditional (pre-tax) 401(k) is usually the better place for the first $24,500 each spouse can defer in 2026, because every deferred dollar avoids current tax at a combined federal and state rate that is often above 45% today. The Roth 401(k) tends to win only when your tax rate now is lower than the rate you expect in retirement. Families at this income level can still build large Roth balances, but they usually do it through the mega backdoor Roth and the backdoor Roth IRA rather than through Roth deferrals.

That answers the common question “is it better to max out the Roth or the 401(k)?” in one line: max out the 401(k) either way, then pick the tax treatment by comparing your marginal rate now with your likely rate later. The rest of this article shows how to make that comparison with real numbers.

The 2026 401(k) limit is shared between Roth and pre-tax

For 2026, the elective deferral limit for 401(k), 403(b) and governmental 457 plans is $24,500 per person (IRS Notice 2025-67). That is one limit, not two. You can put all $24,500 in pre-tax, all in Roth, or split it, but the total across both buckets cannot exceed $24,500. If you changed employers during the year, the limit also applies across both plans combined (IRS, 401(k) contribution limits).

Three other 2026 numbers matter for this reader:

• Catch-up at 50+: $8,000 for 2026, or $11,250 if you turn 60, 61, 62 or 63 in 2026.
• Roth catch-up rule for high earners: if your 2025 FICA wages from the employer sponsoring the plan were above $150,000, your 2026 catch-up contributions must go in as Roth. You do not get to choose.
• Total annual additions: $72,000 for 2026, covering your deferrals, employer contributions and any after-tax contributions (catch-ups sit on top). The gap between $72,000 and what you and your employer already put in is the room for a mega backdoor Roth, if your plan allows it.

How the two 401(k) types are taxed

Sources: IRS Roth comparison chart, IRS RMD FAQs, IRS Publication 15 (2026).

Two points surprise many high earners. First, unlike a Roth IRA, the Roth 401(k) has no income limit, so a $1.5 million household can contribute. Second, neither option lowers payroll tax. The Additional Medicare Tax (0.9% on wages above $250,000 for joint filers in 2026) and California SDI (1.3% of all wages for 2026, no cap) apply whether you choose Roth or traditional.

Why the traditional 401(k) usually wins in California at this income

The whole decision comes down to one comparison: the tax rate you avoid today versus the rate you will pay when the money comes out. At $750,000 to $3 million of W-2 income in California, today’s rate is close to the highest it will ever be.

• Federal: for 2026, married couples filing jointly pay 35% on taxable income from $512,450 to $768,700 and 37% above that (IRS Rev. Proc. 2025-32).
• California: 2026 brackets are not yet published. On the 2025 schedule for joint filers, the rate is 10.3% from $742,958 to $891,542, 11.3% up to $1,485,906, and 12.3% above that, plus 1% more on taxable income over $1 million (FTB 2025 rate schedules).

Retirement income is usually much lower than peak earning years, and the family may not live in California by then. Federal law bars a state from taxing qualified retirement plan distributions paid to someone who is no longer a resident (4 U.S.C. §114). A couple who defers at 10.3% or 11.3% California tax and later retires to Washington, Nevada or Texas never pays that California tax back.

What changes for Washington families

Washington has no wage income tax for 2026 (WA DOR), so the pre-tax deferral only saves federal tax. That narrows the gap, and a Roth split becomes more reasonable for a WA household that expects a high federal bracket in retirement. Two caveats: Washington enacted a 9.9% income tax for individuals and joint filers with adjusted gross income over $1 million, starting January 1, 2028 (how it treats retirement contributions is still pending DOR guidance), so pre-tax deferrals may start to matter at the state level for $1M+ households from 2028. And retirement accounts are exempt from Washington’s capital gains tax either way.

Worked example: a $900,000 household in San Jose

Assumptions (illustrative): Priya works in biotech and earns $520,000 in salary and RSUs. Daniel is a physician earning $380,000. They file jointly, have two children aged 4 and 7, both are under 50, and each can defer $24,500 for 2026. We assume the federal standard deduction ($32,200 for 2026) and a California taxable income of $880,000 before deferrals, using the 2025 California schedule because 2026 is not published.

1. Federal taxable income without deferrals: $900,000 minus $32,200 = $867,800. That is above $768,700, so their top federal rate is 37%.
2. Federal taxable income with $49,000 of pre-tax deferrals: $818,800. Still in the 37% bracket, so every deferred dollar saves 37 cents. Federal saving: $49,000 x 37% = $18,130.
3. California: taxable income falls from $880,000 to $831,000, all inside the 10.3% bracket. State saving: $49,000 x 10.3% = $5,047.
4. Total 2026 tax saved by choosing traditional: $23,177, a combined rate of 47.3%.

Now the retirement side. Suppose they retire in Washington and draw $250,000 a year of taxable income from pre-tax accounts. After the $32,200 standard deduction, $217,800 of taxable income lands in the 24% federal bracket ($211,400 to $403,550 for 2026), with no state income tax at that level. They saved tax at 47.3% and pay it back at a top rate of 24%. Even if they stay in California, the 2025 CA rate on joint taxable income between $145,448 and $742,958 is 9.3%, for a combined top rate of about 33.3%, still well below 47.3%.

The catch: the $23,177 only helps if it is invested, not spent. A simple habit is to move the tax savings each year into a taxable brokerage account or a 529, so the traditional choice can actually produce more wealth than the Roth.

When a Roth 401(k) makes sense for a high earner

• A low-income year. Parental leave, a sabbatical, a gap between jobs, or the first partial year in a new role can drop you into the 24% or 32% bracket. Roth deferrals in that year are cheap.
• Very large pre-tax balances already. If projected RMDs alone would keep you in the 35% or 37% bracket in your 70s, more pre-tax money adds to that problem.
• Money you expect your children to inherit. Inherited Roth accounts generally come out income-tax-free to heirs once the five-year rule is met, while inherited pre-tax accounts are taxed at the heir’s rate, often during their own peak-earning years (IRS Publication 590-B).
• Tax diversification. Some families want a share of retirement savings that is not exposed to future rate changes. At this income, the mega backdoor Roth usually provides that more cheaply than Roth deferrals.

Getting Roth money without giving up the deduction

High-income families can keep the pre-tax deferral and still build Roth savings in two ways.

Mega backdoor Roth. Using the worked example, if Priya’s employer contributes $12,000, her 2026 room for after-tax contributions is $72,000 minus $24,500 minus $12,000 = $35,500. If the plan allows after-tax contributions and in-plan Roth conversions, that money can move into Roth with little or no tax, because the after-tax dollars were already taxed. See mega backdoor Roth vs a brokerage account for when it beats a taxable account.

Backdoor Roth IRA. The 2026 Roth IRA income phase-out for joint filers is $242,000 to $252,000, so families in this range cannot contribute directly. They can contribute $7,500 each to a nondeductible traditional IRA and convert it, as long as they watch the pro rata rule on any existing pre-tax IRA money. Our backdoor Roth walkthrough covers the steps.

Common mistakes we see with Roth vs traditional 401(k) elections

• Splitting 50/50 by default. A split feels balanced, but at a 47% marginal rate it gives up a known saving for an uncertain one.
• Not checking the election after a job change. New plans often default to pre-tax at a low percentage, or to Roth. Check the first paystub.
• Assuming the employer match is pre-tax and Roth deferrals are all-or-nothing. Plan rules vary. Read the summary plan description for how the match and after-tax money are treated.
• Treating a 401(k) like a savings account. Queries like “401(k) vs high-yield savings” or “401(k) vs life insurance” compare tools with different jobs. Emergency cash belongs in savings; a 7702 life insurance policy is not a substitute for the 401(k) deduction.

What to write down for your kids

Your children will one day inherit these accounts, and possibly the decision of how to use their own 401(k). A one-page note in your FamilyKnowledge® Library can record which accounts are Roth and which are pre-tax, why you chose traditional deferrals during your peak-earning years, and who the beneficiaries are. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”

When your children start earning their first paychecks, a custodial Roth IRA is where the Roth logic flips: their tax rate is near zero, so Roth is almost always the right call for them.

Frequently asked questions

What is the 401(k) max for 2026?

For 2026 the employee deferral limit is $24,500, shared between Roth and pre-tax. Add $8,000 if you are 50 or older, or $11,250 if you turn 60 to 63 in 2026. Total contributions from you and your employer, including after-tax money, are capped at $72,000, with catch-ups on top. Source: IRS Notice 2025-67.

Can I contribute to both a Roth 401(k) and a traditional 401(k)?

Yes, if your plan offers both. The two share one $24,500 limit for 2026, so a split such as $12,250 each is allowed, but the total cannot go above $24,500 per person. Spouses each have their own limit, so a two-earner household can defer $49,000 combined before catch-ups.

Is a 403(b) different from a Roth 401(k)?

A 403(b) is the version of the plan offered by hospitals, universities and nonprofits. Many 403(b) plans offer a Roth option that works the same way as a Roth 401(k), and the same $24,500 limit for 2026 applies. The Roth versus pre-tax decision follows the same rate comparison described above.

Your next step

Pull your most recent paystub and check three things: your deferral percentage, whether it is set to pre-tax or Roth, and whether your plan allows after-tax contributions. If you want a second set of eyes on the full picture, including RSUs, the mega backdoor Roth and what to document for your kids, our retirement and employee benefits and tax management work at Age Five Family Office™ starts with a Tax & Wealth Assessment.

This is general education, not individual tax advice. The right split depends on your family’s full picture, including expected retirement income, state of residence and plan rules.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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