Should High Earners Contribute to a Roth 401k?

Should every dollar go into a Roth 401(k) if taxes will be higher?

David McKnight reveals why that instinct could actually be one of the most expensive tax decisions a high-income earner can make when it comes to retirement planning.

In this episode, David McKnight addresses two frequently asked questions: “If tax rates are going to be higher in the future, should I be putting every dollar into a Roth 401(k)?” and “Should I be converting as much of my IRA to Roth as quickly as possible?”.
David believes that the current tax rates are as low as we’re likely to see in your lifetime.
The national fiscal trajectory is apocalyptic: there is over $39 trillion in debt that’s going to increase by $2 trillion per year over the next 10 years, and over $200 trillion in unfunded obligations for Social Security, Medicare, and Medicaid.
Despite all of this, politicians on both sides of the aisle seem unwilling to make the tough decisions necessary to address the crisis.
Many people hear that taxes will be higher in the future and conclude that every retirement planning contribution should be immediately redirected into Roth accounts.
However, if you’re a high-income earner contributing heavily into a Roth 401(k) today as part of your retirement planning may actually be one of the most expensive tax decisions you can make.
When evaluating whether to contribute to a traditional 401(k) or a Roth 401(k), the question isn’t whether taxes will be higher in the future.
Rather, it’s “Will my effective tax rate in retirement be higher than the tax rates I’m currently paying on the marginal dollar today?”.
David discusses the so-called Retirement Income Valley, the period of time after your paycheck stops but before social security and RMDs fully kick in.
An Ernst & Young study examining what happens when retirees allocate a portion of their retirement savings to a maximum-funded index universal life policy produced striking results.
Researchers found that if you could divert 30% of your retirement contributions to an IUL with the goal of saving 3-5 years of living expenses by day one of retirement, it helps shield you from stock market volatility.
David stresses that an IUL isn’t designed to replace the investment portion of your portfolio, rather to protect it.