Why Build Your Roth IRA Now More Than Ever?

For decades, the conventional wisdom was clear: if your employer offered a 401(k), you maxed it out. Period. The math was hard to argue with. Every dollar you deferred went in pre-tax, reducing your taxable income today, and you’d pay taxes later — presumably in a lower bracket once you retired and stopped earning a salary. It was essentially the only real retirement savings vehicle available to working Americans with significant income, and for a generation of savers, it worked beautifully.

That playbook isn’t wrong exactly. But it’s incomplete. And for many of our clients, blindly following it into retirement has quietly set up a tax problem that nobody saw coming.

Here’s what we’re seeing more and more in our practice: clients who did everything “right” — saved diligently, built up impressive 401(k) balances — arriving at retirement and discovering that Uncle Sam (and the State of California) are very much still at the table.

The culprit? Required Minimum Distributions, or RMDs.

Once you turn 75 (or 73 for those born 1959 or earlier), the IRS requires you to begin withdrawing a percentage of your traditional IRA and 401(k) balances every year, whether you need the money or not. For a client with a $2 million traditional IRA, that first RMD might be $75,000 or more — stacked right on top of Social Security, pension income, and any other investment income they’re drawing. The result: a Modified Adjusted Gross Income (MAGI) that rivals what they were earning in their working years.

And that’s when the surprises start:

• IRMAA surcharges — Medicare Part B and Part D premiums are income-tested, based on your income from two years prior (for example, your 2024 income determines your 2026 Medicare premiums). In 2026, a married couple filing jointly whose 2024 MAGI exceeded $218,000 begins paying surcharges. Part B premiums climb from $202.90/month per person all the way to $689.90/month per person at the highest income tier ($750,000+ joint). Add Part D surcharges of up to $91.00/month per person on top of that. A couple at the highest tier could pay over $1,561/month in Part B premiums alone — before a single medical claim. Most clients never see it coming.
• Net Investment Income Tax (NIIT) — RMDs inflate your MAGI. When that pushes you above the NIIT threshold ($200,000 single / $250,000 MFJ), your investment income — dividends, interest, capital gains from taxable accounts — becomes subject to an additional 3.8% tax. RMDs themselves are ordinary income and not NIIT’s direct target, but they are the trigger that exposes everything else.
• Bracket creep — Larger RMDs can push Social Security from partially taxable to fully taxable, and spike your overall rate in ways that compound quickly.

The 401(k) deferral strategy deferred taxes beautifully. It just didn’t eliminate them — and for many high earners, it may have concentrated them.

The Roth 401(k) — formally called the “designated Roth” — has been around since 2006, but it has taken years to gain traction. Today, most employer-sponsored plans (401(k), 403(b), 457(b)) offer a Roth option alongside the traditional pre-tax option. The difference is fundamental:

• Traditional 401(k): Contribute pre-tax. Pay taxes on every dollar you withdraw in retirement.
• Roth 401(k): Contribute after-tax. Your money grows tax-free, and qualified withdrawals in retirement are completely tax-free.

Same contribution limits. Same employer match (note: employer matching contributions are always pre-tax on their side — they go into a traditional bucket). The only difference is when you pay the tax.

This is a genuine choice that didn’t exist a generation ago. And we think it changes the retirement planning conversation entirely.

The instinctive reaction to a Roth 401(k) for a high earner is “but I’m in the 35% bracket — why would I pay taxes now?” It’s a fair question. Here’s how we think about it.

First, consider California. If you’re in the 35% federal bracket and a California resident, your combined marginal rate is roughly 48% (35% federal + 13.3% CA). That feels painful. But ask yourself: what will the combined rate be when you’re forced to take RMDs in 20 years? The 2017 Tax Cuts and Jobs Act provisions have since been made permanent under legislation signed in 2025 — so today’s rates aren’t a temporary gift waiting to be taken away. But “permanent” in tax law is a relative term. Federal deficits continue to grow, and history shows that Congress can and does raise rates when fiscal pressure demands it. There is no guarantee that today’s brackets will look the same in 15 or 20 years. And crucially: in retirement, your effective rate is determined not just by the tax code, but by how much income you’re forced to take — and RMDs give you very little control over that.

Second, consider the compounding advantage. When you contribute to a Roth, every dollar of future growth accumulates completely tax-free. There’s no future tax liability hiding inside the account. What you see is what you get.

Third, consider what you’re avoiding. Roth accounts have no RMDs during the owner’s lifetime. That means you control the timing and size of your withdrawals in retirement — and you don’t involuntarily generate taxable income that triggers IRMAA surcharges, exposes investment income to NIIT, pushes Social Security into full taxation, or spills into higher brackets.

The “stomach the taxes now” concept is really about this: you are trading a known tax hit today for complete tax freedom on all future growth. For someone with decades of compounding ahead of them, that’s often the better trade.

Let’s make this concrete. Consider a 55-year-old professional — we’ll call her Laura — who is planning to retire at 67 and remain in California. She’s in the 35% federal bracket today, combined rate of approximately 48%. She does not anticipate a low-income year to do Roth conversions between now and retirement. And she believes — reasonably — that tax rates will be higher by the time she retires, not lower. We’ll assume a combined retirement rate of 53% (reflecting potential rate increases at the federal level plus California’s top rate of 13.3%).

Laura is deciding whether to put $100,000 (in pre-tax equivalent terms) into her traditional 401(k) or her Roth 401(k), and let it grow for 12 years at an assumed 7% annual return.

*Assumes RMDs are taxed at a higher combined rate in retirement.

The Roth already comes out ahead by approximately $11,300 on income taxes alone — even though Laura paid at a painful 48% today. But that’s not the whole story.

Now layer in NIIT. Laura has a taxable brokerage account generating $80,000 per year in investment income — dividends, interest, and capital gains. In retirement, her traditional 401(k) RMDs push her MAGI well above the $250,000 NIIT threshold for married filers, which means that $80,000 in investment income is subject to an additional 3.8% tax ($3,040/year).

With Roth withdrawals, Laura’s MAGI footprint is dramatically lower. Depending on her other income sources, she may keep that investment income below the NIIT threshold entirely — saving her the $3,040 annually. Over a 20-year retirement, that’s $60,800 in additional tax she avoids — and that’s before accounting for any IRMAA Medicare surcharges she sidesteps from the same lower MAGI.

The true after-tax advantage of the Roth grows considerably once you account for these cascading MAGI effects. The income tax comparison in the table above is just the starting point.

There is one more dimension to this conversation that we don’t talk about enough — and it may be the most compelling argument of all for building your Roth accounts.

What happens to your retirement accounts when you pass them on?

Under the SECURE Act, most non-spouse beneficiaries (think: your adult children) no longer get to stretch inherited IRA distributions over their own lifetime. Instead, they must fully empty the inherited account within 10 years. That rule applies to both traditional and Roth accounts. So far, so equal.

But the experience of inheriting those two account types is profoundly different.

Your child inherits your traditional IRA. Every dollar in that account has never been taxed. The IRS has been patient — but they won’t wait forever.

If you passed away after your Required Beginning Date (the year you turned 75), your beneficiary isn’t just subject to the 10-year rule — they are also required to take annual minimum distributions in years 1 through 9, based on their own life expectancy, and then empty the remainder in year 10. They have very little control over the timing.

Here’s the problem: your children are likely in their 50s or 60s when they inherit. That’s often their peak earning years. Every dollar they pull from the inherited IRA lands on top of their own W-2 income, their own investment income, and potentially their own RMDs — pushing them into the highest federal brackets and California’s 13.3% top rate. Depending on the size of the account, they could easily be paying 48–50%+ on every distribution.

What you intended as a meaningful inheritance becomes, in effect, a multi-year tax obligation your heirs didn’t ask for — on a schedule they can’t fully control.

Now imagine your child inherits your Roth IRA instead.

The same 10-year rule applies. But here’s the key difference: because you had no RMDs on your Roth IRA during your lifetime, your beneficiary has no annual distribution requirement during years 1 through 9. They can let the entire account sit — growing completely tax-free — for the full decade, and take a single lump-sum distribution at year 10. Or they can draw it down on any schedule they choose. Either way, every dollar they receive is completely tax-free.

Think about what that means in practice. A $500,000 inherited Roth IRA, left untouched for 10 years at 7% growth, becomes approximately $983,000 — and your heir takes every penny of it with zero federal or California income tax. Zero NIIT exposure. No impact on their own IRMAA, no bracket contamination, no planning gymnastics.

Compare that to a $500,000 inherited traditional IRA with mandatory annual distributions, taxed at a combined 48% rate. The after-tax value your heir actually keeps — net of the decade’s worth of forced, top-bracket withdrawals — could be as little as $520,000–$550,000 depending on timing and investment return during the distribution period.

That’s a gap of $400,000 or more on the same original balance. Not from better investing — simply from account type.

*Illustrative only. Actual results depend on beneficiary income, timing of distributions, and applicable tax law at time of distributions.

When you leave a Roth IRA to your heirs, you aren’t just leaving them money. You’re leaving them 10 years of tax-free compounding and the complete freedom to deploy those funds without a tax consequence. For many families, that’s the single most efficient wealth transfer available — no trust structure, no gifting strategy, no estate planning maneuver comes close to the simplicity and power of a fully funded Roth IRA passing to the next generation.

It’s the retirement account that keeps giving — long after you’re gone.

If your income is too high to contribute directly to a Roth IRA (in 2026, the phase-out begins at $153,000 for single filers and $242,000 for married couples filing jointly, with no contribution allowed above $168,000 single / $252,000 MFJ), don’t stop there. There are two powerful strategies to build your Roth balances even further:

This is a two-step process that allows high earners to fund a Roth IRA regardless of income:

• Make a non-deductible contribution to a traditional IRA (up to $7,500 in 2026; $8,600 if age 50+).
• Convert that traditional IRA to a Roth IRA shortly after — before the account earns meaningful gains.

Because you already paid taxes on the contribution (it was non-deductible), the conversion is largely tax-free. One important caveat: the pro-rata rule applies if you have other pre-tax IRA funds. If you have a significant traditional IRA balance, a portion of each conversion is taxable. Talk to us before executing this — the mechanics matter.

Done correctly and consistently, the backdoor Roth adds $7,500–$8,600 per year to your tax-free bucket. Modest individually, but meaningful compounded over a decade.

If your employer’s 401(k) plan allows after-tax contributions (beyond the standard employee deferral), this strategy can move significantly more into your Roth account.

Here’s how it works: The IRS total contribution limit for 401(k) plans in 2026 is $72,000 ($80,000 with standard catch-up; $83,250 with the super catch-up for ages 60–63). Once you’ve maxed your regular employee contributions and your employer has contributed their match, the remaining room can potentially be filled with after-tax contributions — which can then be converted to Roth, either through an in-plan Roth conversion or a rollover to a Roth IRA.

Depending on your employer’s match, the mega backdoor Roth can allow an additional $25,000–$40,000+ per year into a Roth vehicle. Not every plan allows this — it requires a plan that permits both after-tax contributions and in-service distributions or in-plan conversions. But if yours does, this is one of the most powerful Roth-building tools available to high earners.

The Super Catch-Up (ages 60–63) is a SECURE 2.0 provision effective January 1, 2025. It allows workers in this specific window to contribute an enhanced catch-up amount — $11,250 instead of the standard $8,000 — before reverting to the standard limit at age 64. This window is short: only four years. If you’re approaching 60 or already in this range, every year you don’t take advantage of it is a year you can’t get back. And if you’re directing those super catch-up dollars to your designated Roth? That’s potentially $11,250 in extra after-tax, tax-free-forever contributions — in a single year.

At Wealth Analytics, we don’t believe in an all-or-nothing approach to tax planning. What we advocate for is building three buckets going into retirement:

• Taxable accounts (brokerage) — flexible, subject to capital gains rates, good for liquidity
• Tax-deferred accounts (traditional IRA, 401(k)) — great for lower-income years, conversions, and for assets you don’t plan to touch for a long time
• Tax-free accounts (Roth IRA, Roth 401(k)) — tax-free income, no RMDs, IRMAA-neutral, NIIT-neutral, maximum flexibility

Having all three gives you something invaluable in retirement: choice. In a year when you need extra cash, you can pull from Roth without triggering forced income, bumping your MAGI into an IRMAA tier, or exposing investment income to NIIT. In a year when your income is modest, you can draw from your traditional accounts at a lower rate. That flexibility is worth real dollars — and it’s almost impossible to engineer if you spent your entire career in one bucket.

The time to build that balance is now, while you’re still working and the Roth 401(k) contributions are being funded by your paycheck.

Here’s something that doesn’t get enough attention, and it could matter a big role for certain pre-retirees.

Roth IRAs have a 5-year rule: to take qualified tax-free distributions, the Roth IRA must have been open for at least five years. This clock starts the year you make your first contribution to any Roth IRA — and it applies to the account, not you as an individual.

Here’s why this is urgent: When you retire and roll your Roth 401(k) into a Roth IRA, those funds adopt the 5-year clock of the receiving Roth IRA — not the Roth 401(k). If you’ve never opened a Roth IRA before, your funds could be locked up for five years after the rollover before you can access earnings tax- and penalty-free.

The fix is easy: open a Roth IRA now. Even a $1 contribution starts the clock. If you’re a high earner who can’t contribute directly, use the backdoor strategy to fund it annually. By the time you roll your Roth 401(k) in at retirement, your 5-year clock will already have been running — and you’ll have full access to those funds if you need them.

This is one of those small housekeeping moves that can make a surprisingly big difference at exactly the wrong moment.

The old conventional wisdom — defer everything, pay taxes later — made perfect sense when deferral was the only option and tax rates seemed predictably modest. Today, we’re watching clients get hit by taxes in retirement they never anticipated: RMDs that inflate their MAGI, IRMAA surcharges that quietly inflate their Medicare premiums, NIIT exposure on investment income they never expected to be taxed further, and bracket exposure they simply can’t avoid once withdrawals are forced.

The Roth revolution — designated Roth accounts in workplace plans, backdoor contributions, mega backdoor strategies — gives us tools to solve this. Yes, contributing to a Roth in a high combined tax bracket feels painful. But paying taxes on a dollar today is often a much better deal than paying taxes on several dollars of compounded growth in 20 years, in a potentially higher-rate environment, on a schedule the IRS controls — while simultaneously triggering a cascade of MAGI-related costs you could have avoided entirely.

We help clients think through this trade-off every day. If you’re wondering whether your current retirement savings strategy is setting you up for a tax surprise down the road — or if you want to understand whether the backdoor Roth, the mega backdoor Roth, or a shift to designated Roth contributions makes sense for your situation — let’s talk.