Vanguard's "How America Saves 2024" report reveals that only 14% of 401(k) participants contribute the maximum $23,500. The average contribution rate is just 7.4% of salary. Most workers stop at the employer match and leave massive tax savings and compound growth on the table.
Traditional vs Roth 401(k)
Traditional contributions reduce your current taxable income; Roth contributions grow and are withdrawn tax-free. The optimal choice depends on your current versus expected future tax rate. If you earn $85K now and expect $120K+ in retirement income (including RMDs and Social Security), Roth likely wins. If you earn $150K now and expect $60K in retirement, traditional wins. Many plans offer both — you can split contributions strategically.
The Contribution Order of Operations
Step 1: Contribute up to employer match (100% instant return). Step 2: Max HSA if eligible ($4,300 single). Step 3: Max Roth IRA ($7,000). Step 4: Return to 401(k) and max to $23,500. Step 5: After-tax 401(k) contributions with mega backdoor Roth conversion if your plan allows. This sequence optimizes for tax diversification and flexibility.
The Mega Backdoor Roth
After maxing the $23,500 employee limit, some plans allow after-tax contributions up to the total 415(c) limit of $70,000 (including employer contributions). These after-tax dollars can be converted to Roth — in-plan or via rollover — making this the most powerful wealth-building tool for high earners.
Originally published on WealthWise OS