Listener Julie recently wrote in with a thoughtful and nuanced question that touches on one of the most important tax optimization decisions we can make on the path to financial independence. Here’s her full message, which we’ll unpack section by section:
I have a Roth 401K that I contribute 19% to, this exceeds the annual contribution limit but my employer allows after tax contributions so that I can continue to receive their match. Since I have 19% deducted after taxes and also have 15% deducted for ESPP, and then a little more to max out my HSA,
I don't feel like I am making a lot, however on my 2024 taxes I was shocked that I barely stayed below $200k (gross earnings and realized gains from a taxable brokerage account- mostly selling ESPP shares after a year to ensure company stock doesn't exceed 50% of my holdings).
After listening to your podcast episode on chooseFI, it made me wonder if this is reasonable, because there is no chance of me having an income like this in retirement.
Should I switch my contributions to pre-tax and use the increase to my paycheck to buy VTI in my taxable brokerage, then plan to do Roth conversions in early retirement?
For background, I am 47, net worth around 1.3, and my goal is to achieve a somewhat chubby FI by age 57-60, to allow the option to spend some of my retirement near family in CA where living is much more expensive than my current NC location.
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Understanding the Real Question: When Do You Want to Pay Tax?
Let’s start with the big picture: The Roth vs. traditional debate really boils down to a more fundamental decision—
Should you pay taxes now or later?
Absent time travel, there are no magic answers here. None of us can see exactly what future tax rates will be. But what we can do is estimate what’s most likely, and make smart, tax-efficient moves based on today’s brackets, rules, and personal circumstances.
Why Julie’s Situation is So Common—and So Important
Julie is 47, with a net worth of ~$1.3 million, saving aggressively for retirement. Her 2024 tax return surprised her: almost $200,000 in gross income. Assuming Julie is single, she's comfortably in the 24% marginal federal tax bracket in 2025, and potentially brushing against the 32% if bonuses or gains creep higher.
Accumulators in the 24% bracket or the 32% bracket pay that tax now by using the Roth 401(k). But in retirement? Many retirees live off much less annually in retirement than their high earning years' salary. That opens the door for serious tax rate arbitrage.
2026 Federal Tax Brackets (Single Individuals)
To ground this conversation, let’s look at the 2026 federal tax brackets for single individuals:
| Bracket | Taxable Income |
|---|---|
| 10% | $0 – ${{ current.marginal_tax_bracket.single.0.max_income }} |
| 12% | ${{ current.marginal_tax_bracket.single.1.min_income }} – ${{ current.marginal_tax_bracket.single.1.max_income }} |
| 22% | ${{ current.marginal_tax_bracket.single.2.min_income }} – ${{ current.marginal_tax_bracket.single.2.max_income }} |
| 24% | ${{ current.marginal_tax_bracket.single.3.min_income }} – ${{ current.marginal_tax_bracket.single.3.max_income }} |
| 32% | ${{ current.marginal_tax_bracket.single.4.min_income }} – ${{ current.marginal_tax_bracket.single.4.max_income }} |
| 35% | ${{ current.marginal_tax_bracket.single.5.min_income }} – ${{ current.marginal_tax_bracket.single.5.max_income }} |
| 37% | ${{ current.marginal_tax_bracket.single.6.min_income }}+ |
(Married filing jointly filers have roughly double these thresholds for brackets through the 32 percent bracket.)
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Traditional vs. Roth 401(k): What’s the Lifetime Tax Bill?
Let’s break this down:
Roth 401(k) Strategy
- Pay 24%+ tax now
- Withdraw tax-free in retirement
- No tax drag or conversion needed later
💸 Alternative Strategy: Traditional 401(k) + Taxable Brokerage
- Defer tax now → reduce income and stay in lower brackets
- Invest extra take-home in low yielding domestic equities
In retirement, this can open up a world of opportunities. Living first off long-term capital gains and qualified dividends could result in years of living federal income tax free. Another possiblity is low or no taxed Roth conversions.
Why “Conventional Wisdom” on Roth Is Often Wrong
Conventional advice says Roth is often better if you can afford it. But that advice assumes you'll always be in a higher tax bracket later. For most people on the path to FI, the opposite is true.
As I discuss further in this Article, accumulators (especially high earners in their 40s and 50s) should often ignore the Roth hype. Traditional contributions can unlock serious tax savings today and optionality in early retirement.
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How Should Most High Earning Accumulators Approach Retirement Savings?
Here’s how I’d approach it:
✅ 1. Strongly Consider Maxing Out Traditional Workplace Retirement Account Contributions
This reduces current taxable income, freeing up current funds for additional investments, and provides more flexibility later.
✅ 2. Use Extra Take-Home Pay to Increase Taxable Investments
Taxable brokerage accounts are not the enemy—especially if you’re investing in low-dividend domestic equities. You maintain liquidity, flexibility, and tax-efficient growth.
✅ 3. Great Opportunities in Retirement
Accumulators buiding up a combination of traditional retirement accounts, taxable accounts, and possibly Roth IRAs will have great opportunities through drawdown strategies and potential Roth conversions to limit total lifetime taxation and get great results in retirement.
But What If Tax Rates Go Up?
Sure, there’s a risk that Congress could raise taxes in the future. I believe that risk to be rather modest. Even if tax rates increase, taxable income tends to significantly decline in retirement, and America has progressive tax brackets. That combination, regardless of future tax hikes, means most people are likely see their income tax exposure decline in retirement. This is applies even more so for early retirees.
Plus, don’t forget the standard deduction—in 2025, that, prior to any tax law changes is $15,000 for singles and $30,000 for married couples, which means you can generate significant income in retirement prior to any of it being subject to federal income tax.
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Summary: It’s About Lifetime Tax Strategy, Not Just This Year
The fundamental question is:
“When should I pay tax to minimize my lifetime tax bill?”
For for many in the FI community—the answer will be:
- Defer tax now
- Invest the savings
- Use drawdown to your advantage in retirement
That’s a smart, flexible path toward “chubby FI” and a retirement that gives aspiring early retirees options.
