Disclosure: This site contains affiliate links. If you click and sign up or make a purchase, I may receive a commission or referral bonus at no extra cost to you. I only recommend tools and resources that I believe add value to the ‘Snowball’ journey.
I’ve noticed recently that people seem to really push for the power of the Roth IRA. I understand the appeal. I like the Roth, a lot, but I think that many people don’t look at the current tax savings they could have right now by focusing on their 401k contributions and their Traditional IRA.
A few weeks ago I pointed out that at the highest taxable rate that an IRA was fully deductible you’d save roughly $1,500 in taxes capping the 2026 $7,500. This requires a MAGI of $81,000 or less single/head of household, and $129,000 or less Married Filing Jointly (MFJ). This is if you have a work place plan, because we’re talking about 401ks.
Once you reach MAGI $153,000 Single, or $242,000 MFJ your Roth contributions are limited, with MAGI $168,000 + Single, and $252,000 MFJ no longer allowing any Roth contributions. The in between is a phase out period for the Roth with partials, but we’re aiming for easy math right now.
The reason for this article, was coming from a reddit thread:
“Looking to retire at age 65, $135k salary currently. I contribute up to the full employer match, employer matches 50% up to 6%, and kicks in an additional 5% profit share that gets deposited straight into the 401(k). I have maxed out the Roth IRA for 2023, 2024, and 2025.”
They further explained that they are in a HCOL area that stops them from having enough extra funds to cap their 401k and max out their IRA. Obviously, since we are frugal here, I disagree with that, but I wanted to math out why the tax brackets that are above the traditional IRA deduction line, MUST cap their 401k first. If you recall $1000 into a 530A at birth in the S&P 500 would be over $1 million at age 65 with no additional contributions.
So lets look at this high end single filer 1st. $135,000 salary, employer matches $0.50 per $1 for 6% of salary, plus 5% more “profit share”. So 6% of $135,000 is $8,100 contributed out of our 2026 cap of $24,500 (under age 55). They have $16,400 more they could contribute for the year. $7,500 they have been putting into their Roth IRA. We’ll test with NY state tax (10%), and OH state tax (4%). HCOL probably means NY, Cali, or Washington, but they don’t say.
| Account | Amount | Federal Tax (24%) Saved | State Taxes (high 10%) Saved | State Taxes (low 4%) Saved |
|---|---|---|---|---|
| 401k already | $8,100 | $1,944 | $810 | $324 |
| 401k instead of IRA | $7,500 | $1,800 | $750 | $300 |
| Roth IRA | $7,500 | $0 | $0 | $0 |
| 401k Cap Total Potential Tax Savings | $24,500 | $5,880 | $2,450 | $980 |
So if they take their Roth and put it into their 401k instead. They add $2,550 in tax savings or ($2,100 low state tax). If they put the $2,550 in tax savings into their 401k they generate $867 more in tax savings. Which can then be contributed. Saving 34% of the $867. You get the idea.
I used the tools of the internet to double check this but $11,363 is roughly what you could add to the 401k based on the tax savings of $7,500 going into the 401k instead of a Roth. That would put the Original Poster at $19,463 vs the $15,600 they are currently contributing. A difference of $3,863 saved on taxes and growing and compounding. Over 30 years in VOO at historical 10% return average that’s $625,000 more in compounding and growth, instead of paying $3,800 x 30 years ($114,000) in taxes.
The key here, though, is that capping your 401k. As a Single person in the traditional IRA phase out salary range you will save roughly $5,880 to $8,330 in taxes. That tax savings is a hefty chunk that can go into the Roth IRA. Even in a zero state income tax state that’s only $1,620 more to cap for 2026. That’s $4.44 a day.
MFJ is similar. If you’re solidly over the $129k MAGI and can’t deduct tIRA contributions, then you’re also in the 24% bracket with almost a full IRA contribution worth of tax savings waiting for you in the 401k.
If either of those brackets can push their MAGI below the thresholds (81k single, 129k MFJ) Then a capped IRA produces $1500 more in Tax savings. That’s $7,380 you saved in Taxes putting $7,500 into your tIRA, plus your 401k. The IRA paid for itself in the 24% bracket.
If you used Robinhood Gold to cap your IRA, you also received $225 in matching contributions. (Don’t forget your free stock at Robinhood Affiliate Link). The Robinhood Gold 3% match is $37, 000 more into retirement.
In conclusion, don’t prioritize Roth if you aren’t already capping your 401k. The tax savings can fund your IRA by themselves.
~~Miniwing~~
Stoic, Investor, Parent