By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.
The usual 401(k) investment strategy by age is simple: hold mostly stocks while you are young, then shift gradually toward bonds as retirement gets closer. That rule works for a household whose 401(k) is its main investment. For a California or Washington family earning $750,000 or more, with RSUs, a brokerage account and kids under 12, age is a weaker input than three others: what the rest of the household already owns, which account each asset sits in, and how much you can put in each year.
This article explains the standard rule, why it breaks for W-2 households with large equity compensation, and how to set a 401(k) mix by looking at the whole balance sheet. It includes a worked example for a $1.1 million Bay Area household and the 2026 contribution limits that change by age.
What the standard age-based rule says
Most age-based guidance, including the target-date funds in many 401(k) menus, follows a glide path. The fund holds a high share of stocks for decades, then moves toward bonds and cash on a schedule tied to an expected retirement year. The logic is sound: a 35-year-old has about 30 years to recover from a market fall, and a 62-year-old does not.
The rule makes two assumptions that rarely hold for our reader. First, that the 401(k) is most of what you own. Second, that your paycheck is unrelated to the stock market. When a large part of your pay arrives as stock in one company, both assumptions fail.
Why your 401(k) is only one slice of the household portfolio
An Apple, Amazon, Genentech or Gilead employee with several years of RSU grants often holds more in employer stock than in the 401(k). Unvested grants add more exposure to the same company, and your salary, bonus and future grants also depend on that company doing well. If the 401(k) is then set to the age-based default of mostly stocks, the household can end up far more concentrated in equities, and in one employer, than anyone intended.
The better question is not “what should a 38-year-old hold in a 401(k)?” It is “what should this household own in total, and which account is the best place to hold each piece?”
Worked example: a $1.1 million household in the Bay Area
Assumptions (illustrative, not a recommendation): Priya, 38, is an engineer at a large tech company with $700,000 of W-2 pay including RSUs. Daniel, 40, is a scientist at a biotech company with $400,000 of W-2 pay. They file jointly in California and have two children, ages 4 and 7. Their investable assets:
| Account | Value | Holdings today |
|---|---|---|
| Two 401(k)s | $520,000 | Age-based default, about 90% stocks |
| Vested employer stock (Priya) | $650,000 | One company |
| Taxable brokerage | $300,000 | US stock index fund |
| Total investable | $1,470,000 |
Priya also has about $800,000 of unvested RSUs, which are not yet theirs and are left out of the total.
What they actually own. Employer stock is $650,000 of $1,470,000, or 44% of investable assets in one company. Stocks overall are $650,000 + $468,000 (90% of the 401(k)s) + $300,000 = $1,418,000, or about 96% of the total. Each 401(k), viewed alone, looks “right for their age”. The household is close to all stocks and heavily tied to Priya’s employer.
A household-level fix. Suppose they decide, as a written family policy, on 80% stocks and 20% bonds across everything they own (an illustrative target). Twenty percent of $1,470,000 is $294,000 in bonds. If all of the bonds sit inside the 401(k)s, the 401(k)s hold $294,000 of $520,000 in bonds, about 57%. On its own that 401(k) looks too conservative for a couple around 40. As part of the household, it is what brings the total to 80/20.
Separately, they set a schedule to sell part of the vested employer stock each quarter and reinvest it in diversified funds. That is a tax decision, so it belongs in the same plan.
Asset location: why bonds often belong inside the 401(k) in California and Washington
Where an asset sits can matter as much as what it is.
- Bond interest is taxed as ordinary income federally. At this income, the top federal rate for 2026 is 37% on married joint taxable income over $768,700 (IRS Rev. Proc. 2025-32). Holding taxable bonds inside a 401(k) defers that tax.
- California taxes all capital gains as ordinary income, with no lower rate (FTB). The top rate is 13.3%, including the 1% Behavioral Health Services Tax on taxable income over $1,000,000 (2025 schedule). Rebalancing inside a 401(k) creates no taxable sale. Rebalancing in a brokerage account can.
- Washington has no wage income tax in 2026, but it taxes long-term capital gains at 7%, and 9.9% on taxable gains above $1,000,000, after a standard deduction of $278,000 (2025, latest published). Retirement accounts are exempt (WA DOR). Washington has also enacted a 9.9% income tax on AGI over $1,000,000 starting January 1, 2028 (WA DOR), which matters for the Roth versus pre-tax choice below.
The general pattern: diversified stock index funds, which are taxed lightly while held, in the brokerage account; bonds and frequent rebalancing inside the 401(k). Your plan’s fund menu and your own facts can change this.
2026 contribution limits that change with age
How much you can put in matters more than the fund you pick. For 2026 (IRS Notice 2025-67):
| Age in 2026 | Employee deferral | Catch-up | What to decide |
|---|---|---|---|
| Under 50 | $24,500 | None | Pre-tax or Roth; whether the plan allows after-tax contributions (mega backdoor Roth) |
| 50 to 59, or 64+ | $24,500 | $8,000 | Catch-ups must be Roth if your 2025 FICA wages from that employer exceeded $150,000 |
| 60 to 63 | $24,500 | $11,250 (instead of $8,000) | Same Roth rule; plan the years before full retirement |
The total that can go into one person’s plan from all sources (your deferral, employer contributions and after-tax money) is $72,000 for 2026, with catch-ups on top. Plan contributions can be figured only on the first $360,000 of each person’s pay for 2026.
Back to Priya. Assume her employer matches 50% of her deferral ($12,250) and the plan allows after-tax contributions with in-plan Roth conversion. Her room for after-tax money is $72,000 minus $24,500 minus $12,250, or $35,250. For a household at the 37% federal bracket that is already above the Roth IRA income limit, this is often the largest Roth opportunity available. See mega backdoor Roth vs brokerage for how to weigh it against a taxable account.
Pre-tax or Roth 401(k) at a 37% federal bracket
If both Priya and Daniel defer $24,500 pre-tax, they reduce taxable income by $49,000. At a 37% federal rate that defers about $18,130 of federal tax for 2026. At California’s 11.3% bracket (2025 schedule, married filing jointly, taxable income from $891,542 to $1,485,906), it defers about $5,537 more. Because their California taxable income is likely above $1,000,000, part or all of that $49,000 may also avoid the 1% Behavioral Health Services Tax, up to about $490 more. Pre-tax is often the default at this income, because many families expect a lower rate in retirement.
Roth deferrals can still make sense when you expect high taxable income later (large pre-tax balances, RSU sales, or a pension), or when you want accounts with no required minimum distributions. Required distributions start at 73 under current law, and Roth 401(k) accounts have no lifetime RMDs for the owner (IRS RMD FAQs). A planned move from California to Washington used to argue for pre-tax now and lower-tax withdrawals later. Washington’s 2028 income tax on AGI over $1,000,000 makes that assumption less safe for households with very large retirement income.
How the strategy shifts by decade for this family
- 30s, kids under 5. RSU grants are growing. Many families set the stock/bond mix at the household level, defer the full $24,500 each, and use the mega backdoor Roth if the plan allows it. Adding the employer stock fund inside the 401(k) on top of employer shares you already hold increases concentration.
- 40s, kids in school. Employer stock is often at its largest share of net worth. A written selling schedule usually does more for risk than any change to the 401(k) fund menu. 529 funding begins to compete for the same cash.
- 50s. The $8,000 catch-up (2026) becomes available; check whether it must be Roth. If you may stop working before 59½, learn how the rule of 55 applies to your plan before you leave the job.
- 60 to 63. The $11,250 catch-up applies. Many families build a bond and cash reserve inside the 401(k) to cover the first years of withdrawals, so a market fall does not force you to sell stocks low.
If early retirement is the goal, this step-by-step look at retiring on $2 million at 40 shows how the numbers change.
Common mistakes we see at this income
- Setting each 401(k) to a target-date fund and never looking at RSUs and the brokerage account in the same view.
- Buying the employer stock fund inside the 401(k) on top of vested RSUs.
- Holding bonds in the brokerage account and stocks in the 401(k), which can raise the yearly tax bill in California.
- Leaving the mega backdoor Roth unused because nobody checked the plan document.
- Treating 22% RSU withholding as the tax owed. At a 37% bracket, it usually is not, and a surprise April bill can pull cash from savings.
What to write down for your kids
Your children will not remember your fund choices. They can learn from why you chose them. A one-page note, updated once a year, is enough: your household stock/bond target and the reason for it, your rule for selling employer stock, and why you chose pre-tax or Roth. That note becomes part of your FamilyKnowledge® Library and the starting point for a money conversation when your kids are older.
As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”
Frequently asked questions
Is a target-date fund good enough for my 401(k)?
It can be, if the 401(k) is most of what you own. For a household with significant RSUs or a large brokerage account, a target-date fund sets the mix for one account without knowing what the others hold. Many families keep a simple index lineup inside the 401(k) and set the stock and bond weights so the whole household lands on its written target.
Should I hold my company’s stock in my 401(k)?
If you already receive RSUs or ESPP shares, adding more employer stock inside the 401(k) increases exposure to the company that also pays your salary. Most families with large equity compensation keep the 401(k) fully diversified and handle employer stock through a selling schedule in the brokerage account, where the tax effects can be planned year by year.
Does my spouse’s 401(k) need the same mix as mine?
No. Treat both plans as one pool. If one plan has low-cost bond funds and the other has a better stock index fund, it can make sense to hold bonds in one and stocks in the other, as long as the combined household mix matches your target and each spouse is comfortable with it.
Next step
List every account you and your spouse hold, including vested and unvested RSUs, on one page, and calculate your real stock and employer-stock share. If you would like help with that review, our retirement and employee benefits team covers it in the Tax & Wealth Assessment, alongside investment risk management for concentrated stock.
This article is general education, not individual advice. The right 401(k) strategy depends on your family’s full financial picture.
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.
Connect on LinkedIn → · About KevinThis is part of how we approach Retirement & Employee Benefits for high-income W-2 families at Bright Advisers.
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