2026 401(k) Strategy for High Earners | With Dan Pascone | Ep #54

Before you can decide where to put your next dollar, it helps to know the three buckets it can land in. The first is taxable: money that's already been taxed, sitting in a savings or brokerage account, where the growth is generally taxed too. The second is tax-deferred: your traditional 401(k) or IRA, where money goes in pre-tax, grows tax-deferred, and gets taxed when you eventually take it out. The third is future tax-free: generally your Roth accounts (HSAs and 529 plans can fit here too, though we're focused on Roth today). Money goes into a Roth after it's already been taxed, then grows and can typically be withdrawn in retirement tax-free.

Our guide to tax diversification across retirement accounts goes deeper on how to balance all three.

Most people who work for an employer offering a 401(k) start with the traditional, pre-tax contribution, and the employer typically matches some portion of it (common structures range from 4% to 6%, or something like 100% on the first 3% plus 50% on the next 3%). Most plans today also offer a Roth 401(k) option: the money is taxed going in and grows tax-free from there.

What fewer people know about, because not every plan offers it and even fewer know how to use it, is a third bucket inside the 401(k): after-tax contributions. These dollars don't sit in the traditional bucket or the Roth bucket. They sit separately, and they're the foundation of a strategy commonly called the mega backdoor Roth.

These two strategies get confused constantly, but they're not the same thing. A backdoor Roth IRA is for people who earn too much to contribute directly to a Roth IRA: you contribute to a traditional IRA, then convert it to a Roth and pay the taxes on the spot. It's useful, but it's capped at a modest annual amount, generally $7,000 to $8,000 depending on your age. Our full breakdown of the backdoor Roth IRA covers that mechanism in detail.

The mega backdoor Roth is a different animal, and a much bigger lever if your plan allows it. You contribute after-tax dollars into that third 401(k) bucket, then immediately convert them into the Roth account. Because the contribution limits work differently for after-tax dollars than for traditional or Roth 401(k) dollars, this can unlock tens of thousands of dollars in additional capacity every year. We go deeper on the mechanics in our full breakdown of the mega backdoor Roth for 2026.

For 2026, the employee contribution limit for a 401(k), whether traditional, Roth, or a combination of the two, is $24,500. If you're 50 or older, you can add an additional $8,000 in catch-up contributions, and that catch-up amount has to go into the Roth 401(k) bucket. But here's what most people miss: the total combined contribution limit for 2026, including your contributions, any employer match, and after-tax dollars, isn't $24,500. It's $72,000.

That gap between what most people contribute and that $72,000 ceiling is exactly what the mega backdoor Roth is built to fill, but only with after-tax dollars, since you can't put any more into the traditional or Roth buckets once you've hit the $24,500 limit. Our video on the 2026 401(k) changes walks through these figures visually, and the IRS publishes the official numbers each year on its 401(k) contribution limits page.

A client we worked with recently is a good illustration of how the math actually plays out. She contributes the full $24,500 employee limit, and her company matches up to 6%, which came out to an additional $9,000. Add those together and she's at $33,500. Subtract that from the $72,000 total cap, and she has $38,500 in additional capacity available, capacity that can only be filled with after-tax contributions.

To use it, we set up automatic paycheck contributions of roughly $2,000 per paycheck into the after-tax bucket, with those contributions converting to Roth automatically. We'll check the numbers again in the fourth quarter, since additional employer contributions during the year can shift the total and we want to land right at the cap, not over it.

Most high earners don't have much room to build Roth savings. The Roth IRA is capped and often unavailable directly due to income limits, and the Roth 401(k) is capped at the same $24,500 (or $32,500 with catch-up) as the traditional side. The mega backdoor Roth is one of the few ways to meaningfully grow that future tax-free bucket if you have the savings capacity to use it.

That matters because tax-free money gives you options later. If you're making a large purchase in retirement, a vacation home, a boat, a big trip, would you rather pay ordinary income tax on that withdrawal, potentially 10% to 30% depending on your bracket, or pull it out tax-free? Especially with tax rates likely to rise over time, having a meaningful Roth bucket gives you real flexibility in how you fund the things you actually want to do.

The most common pushback goes something like this: why would I pay taxes now on the mega backdoor Roth conversion if my tax rate in retirement is going to be lower? Wouldn't it make more sense to put more into the traditional, pre-tax 401(k) instead?

It's a reasonable question, but it's the wrong frame. This isn't a choice between paying taxes now versus paying taxes later on the same dollars. If you're already maxing out your traditional 401(k) contribution, that decision is made. The question is what happens to the next dollar, the one that can't go into the traditional or Roth 401(k) anymore because you've hit the limit. Without the mega backdoor Roth, that dollar goes into a taxable account, where it's taxed on its growth and taxed again when you access it. With the mega backdoor Roth, that same dollar grows tax-deferred and comes out tax-free. It's not pre-tax versus Roth. It's Roth versus taxable, and Roth wins that comparison for most high earners with dedicated retirement goals.

Start by figuring out your own numbers: add up what you're contributing to the traditional and Roth 401(k), add your employer's match, and subtract that total from $72,000. Whatever's left is your after-tax contribution capacity for the year.

Then ask your benefits team or your 401(k) provider (Fidelity, Vanguard, and Empower are common platforms) two questions. First, does the plan allow after-tax contributions? Second, and this is the important one, does it allow automatic conversion of those after-tax contributions to Roth? That's the cleanest version of this strategy. If automatic conversion isn't available, ask whether the plan allows in-service distributions, which lets you take proportional distributions out of the 401(k) and convert them to a Roth IRA yourself. It's more cumbersome and involves a pro-rata rule worth discussing with your advisor, but it's a workable alternative. We've seen employees ask their benefits team for this feature after learning a spouse's plan already had it, and it prompted the company to add it. It doesn't hurt to ask.

This episode is for high earners who are already maxing out their traditional 401(k), have the savings capacity to do more, and want to build real tax diversification ahead of retirement. If you got a bonus or a raise this quarter and haven't revisited your contribution elections since, this is the right time to look.

If you're already maxing out your traditional 401(k) and want to know whether the mega backdoor Roth is available to you, a Free Wealth Strategy Call with Tailored Wealth is a low-pressure way to run the numbers on your specific plan.