In my previous post, I outlined how to use Roth IRA conversions to dramatically lower taxes for yourself and your estate in retirement. In this post, we want to go back a decade or two. I’m going to outline how and where you should save and invest. For many, there is a lot of confusion on where to save once your income goes above $193,000/year. At this level, there’s a lot of questions around whether 401k contributions should be Roth or pre-tax, and the standard Roth IRA eligibility phases out.

Before we dive in, let’s take a look at the types of tax structures available for investment accounts.

  1. Tax-deferred. These accounts are growing without being subject to taxation on dividends or capital gains, but they will be taxed as income when you take them out. Most of your 401k and IRA dollars are in this bucket (taking your pension as a lump sum? It fits here as well). If you have a non-qualified variable annuity, it would also show up here. (Note: just the gains on VA are subject to income tax, as you’ve already paid income tax on the cost basis.)

  2. Roth. This can be a Roth 401k or a Roth IRA. You’ve already paid tax on these assets, and they now get to grow tax-free.

  3. After-tax. Confusing because this does not mean Roth. After-tax accounts have already been taxed as income, but they are still subject to taxation on any dividends/interest and capital gains. This can be your checking account and any non-retirement investment accounts.

How to think about where to save

The goal is to accomplish two things: we want to save taxes this year, and we want to save taxes in future years. With those two objectives in mind, how we save is critical. When you begin saving and investing, it’s often pretty easy to decide where to save. Take advantage of any match. If you expect your income to be a lot higher in the future than it is now, lean towards Roth options over pre-tax. But as your career continues and your earnings increase (and marriage might mean doubling those earnings), where to save becomes a lot more complicated.

Let’s use an example of a couple named John and Mary making $400,000 per year. While this is a fantastic income, it also poses some challenges. My goal here is to bring clarity and tax planning when it becomes a lot less obvious where you should save. We’ll touch briefly on how John and Mary can maximize their charitable deductions at the end. I’ll probably devote an entire article to that at some point.

Let’s pretend John and Mary are 45 years old and want to save $100,000 each year.

How and where they save becomes critical. For example, if they received their income and put $100,000 in a taxable investment account, they would lose out on obvious tax benefits. At their current income, they can expect to pay around $82,000 in federal income tax. By allocating their savings appropriately, they can reduce that tax burden both this year and in future years. For reference, here are the tax brackets if you are married filing a joint return:

Tax brackets


So, if you want to save $100,000 like John and Mary, here’s one way you could do it.

  1. HSA-$7,000. HSA’s are becoming very popular for a good reason. Most tax-advantaged accounts have one benefit with tradeoffs. For example, your pre-tax 401k can lower your taxable today, but you have to pay income tax eventually. With a Roth, it’s the opposite. HSA’s give you all of these benefits bundled into one. It’s pre-tax and lowers your taxable income when you contribute. Then, it grows tax-free just like a Roth IRA (assuming you use it on eligible medical expenses-of which there are many in retirement). Given that the current max is $7,000 per year, this is an excellent first place to save.

  2. Pre-tax 401k-$19,000 (under age 50) or $56,000* each. Note that I wrote pre-tax. The reason I picked $400,000 for John and Mary’s income is the dramatic increase in income tax above ~$321,000 (income up to [$321,451+$24,400 standard deduction] is taxed at 24% and below). Above ~$345,000, John and Mary start paying 32%. Because of this high tax bracket, it makes sense to take the tax deduction now and forego Roth 401k contributions. Why? John and Mary will likely face lower taxes in retirement. If their income was $90,000, they might make a different choice. Depending on the scope of their employer benefits and how much they will likely have saved by age 60-70, they might make a different choice with an income of $200,000. But at $400,000, they are well into the 32% bracket. Taking advantage of pre-tax contributions can help tremendously. Plus, they can always convert these assets to Roth in later years when their income isn’t as high.

    *Note: If John or Mary were self-employed (pretend they have an LLC with no other full-time employees), they could go above the IRS elective deferral limit of $19,000. With their income, they can go all the way to $56,000. Doing so could lower their taxable income completely out of the 32% bracket.

  3. Backdoor Roth IRA-$6,000 each. At this point, John and Mary have utilized all of the pre-tax savings vehicles (I’m in Texas where we have no state income tax. So, 529 plans with a state income tax deduction aren’t applicable). With an income of $400,000, I’m a big fan of John and Mary filling up all of their pre-tax buckets. Note that they are not eligible for a deductible contribution to a Traditional IRA. So now that they have utilized all pre-tax options, the problem is finding the next best place to save and invest. Utilizing backdoor Roth IRA contributions can be a fantastic place to save. At this point, John and Mary can either use the Roth or invest in a taxable investment (brokerage) account. The problem with the taxable account is the lack of protection for future dividends, distributions, and capital gains. The Roth shelters you from future taxation. Quick note: To properly execute a backdoor Roth IRA contribution, you need to empty-out any existing IRA accounts (move them to a 401k/403b). If you do have other IRA assets, doing a backdoor Roth IRA becomes a taxable event, and you mess with the pro-rata rules. Your advisor should be able to help with this. Even though the annual limit is only $6,000 per person ($7,000 if you’re above age 50), this can help you save a significant amount of tax-free assets over the next couple of decades.

  4. 529 College Savings Plan-$a lot. After maxing out your first three options, 529 college plans can be a great solution. If you’re interested in paying for your children’s college (or K-12 tuition), you might as well utilize the tax-free growth available in 529 plans. Your advisor can help you determine how much you can put into each 529 account (the IRS allows you to bundle five years’ worth of gifts into one).

  5. Mega backdoor Roth through your 401k-The mega backdoor Roth is a nickname to describe after-tax contributions to your 401k. Note that I said “after-tax” contributions. These are different than pre-tax and Roth contributions. You’re not getting any tax benefit upfront with the mega backdoor Roth. But, if your particular 401k allows them, these contributions can be a powerful way to grow your wealth. Here’s how it works. John and Mary are 45. They can put $19,000 in their 401k. But, the IRS allows much more to be added each year ($56,000) by either them or their company. Let’s say they contribute $19,000 pre-tax, and their company matches another $15,000. They can still contribute another $27,000. This $27,000 receives no upfront benefit, and it grows tax-deferred. However, when you retire or leave your company, the after-tax amount that you have contributed can rollover to a Roth IRA. For this reason, it can be especially beneficial if you plan on leaving your company in the relatively near future.

  6. Taxable Investment Account-Depending on John and Mary’s situation, they may have already surpassed their goal of saving $100,000 each year. For example, if both of them are working, they can both make the 401k elective deferrals and after-tax contributions (if their plan allows it). But let’s pretend that you want to go above and beyond in your savings plan. After all of these options, saving in a taxable brokerage account can work well. Some important considerations for you-be careful about the investments you own in a taxable account. Unlike the rest of this list, you are exposed to taxation on dividends, distributions, and capital gains. To minimize this, own tax-efficient funds with low turnover. This can mean index ETFs or Dimensional funds. Ignoring the tax impact of certain mutual funds can leave you with a much larger tax bill than anticipated. However, if you strategically pick tax-efficient funds and harvest tax losses when available, taxable brokerage accounts can be a great place to invest. Plus, it’s not locked up until retirement age…

Equity Compensation

One note on your employer stock plan (RSU, RSA, ISO, ESPP, 83(b), etc.) You might have noticed this option missing from my list. I left it out for two reasons. First, there are so many different types of stock plans and the taxation/benefits can be quite different. I should probably devote an entire article to them at some point. Second, your particular employer may, or may not, be a good place to invest for several different reasons. However, I will include a couple of thoughts on your employer stock.

  • Pay attention to the total amount you own relative to your other assets. There is some debate on how much of your employer stock is too much. Most agree that if more than 5-10% of your investable assets are in one company, you should begin to diversify. This is especially true with your current employer. Your employer is a major source of your financial stability today. In light of that, they shouldn’t also be the source of your financial well-being tomorrow.

  • If you give charitably, always use the most highly appreciated securities to do so. If you have a taxable investment account with funds or stocks (your employer’s or other) that have significant appreciation, you should never give cash to charity. Let’s pretend that you want to give $30,000 to charity. Option 1: Give $30,000 in cash. Option 2: Give $30,000 in stock with a cost basis of only $15,000. The charitable organization(s) is still getting $30,000, and you’re still getting a $30,000 deduction. But, the charity doesn’t have to pay tax on the $15,000 gain. You do. Maybe you love the stock and don’t want to part with it? That’s fine. Still, gift the $30,000 in stock, and then buy $30,000 of the same stock with your cash. You effectively increased your cost basis and completely removed the $15,000 capital gain, saving you at least $2,250 in taxes, and most likely more. In a future article, I’ll discuss a second strategy-combining multiple years worth of donations into one Donor Advised Fund. Giving $90,000 in one year and taking the standard deduction in the other two years can be a powerful way to maximize your deductions.

When you plan properly around your investment accounts, you lower your tax bill both now and in the future. If you have any ideas or requests for future topics, feel free to email me at