The 5 Biggest Tax Mistakes High Earners Make — And What They Cost You

The 5 Biggest Tax Mistakes High Earners Make — And What They Cost You

Most HENRYs leave $10K-$30K on the table every year without knowing it. Here are the five that matter most.

1. Not doing the Backdoor Roth — cost: $7,000/year in lost tax-free space

If you earn over $161K (single) or $240K (married), the IRS says you can't contribute to a Roth IRA directly. Most HENRYs hear that and assume the door is closed. It's not. The Backdoor Roth is a fully legal two-step that's been available since 2010 — and every year you don't use it, you permanently lose $7,000-$8,000 of tax-free growth space. Over 20 years at 7% return, that's roughly $300,000 of tax-free money you've left on the table.

2. Treating your HSA like a checking account — cost: $8,550/year in lost triple tax advantage

The HSA is the only account that's tax-free going in, tax-free growing, and tax-free coming out (for medical expenses). But most people use it to pay copays and prescriptions immediately, draining the account yearly. The optimal strategy: max the HSA, invest it, pay medical costs out of pocket, and let the HSA compound for decades. Save your receipts — you can reimburse yourself tax-free at any point in the future. At 35% federal + state, the tax arbitrage on a maxed family HSA is worth roughly $3,400/year in upfront deductions alone — before a dollar of investment growth.

3. Front-loading 401(k) contributions without checking the true-up — cost: variable

You earn a bonus in Q1, so you max your $23,500 401(k) contribution by March. Great, right? Only if your employer plan has a "true-up" provision. If it doesn't, your employer match stops when your contributions stop. You've maxed your own contribution — and left employer match dollars on the table for the remaining nine months. Check your plan document or ask HR. If there's no true-up, spread contributions evenly across all pay periods.

4. Holding bonds in your taxable account — cost: 0.3-0.6% annually

Asset location is different from asset allocation. Bonds throw off ordinary income, taxed at your marginal rate (35%+). Hold them in tax-deferred accounts where distributions don't create annual tax drag. Equity ETFs (VTI, VXUS) belong in taxable — they generate mostly qualified dividends, taxed at capital gains rates. The optimization is worth 0.3-0.6% annually. On a $500K portfolio, that's $1,500-$3,000/year — for holding the same investments in different accounts.

5. Ignoring the Mega Backdoor Roth — cost: up to $40,000/year in lost Roth space

The regular Backdoor Roth gets you $7,000/year. The Mega version — if your 401(k) plan supports after-tax contributions and in-plan Roth conversions — can get you $40,000+. The total 401(k) cap is $70,000/year (2025), and most HENRYs only use the $23,500 employee portion. The gap between what you contribute and $70,000 can be filled with after-tax dollars and converted to Roth. Check your plan documents for "after-tax contributions" and "in-plan Roth rollovers." Two features, one call to HR.

These are five fixes. The full HENRY Plan covers all of them in detail — step-by-step instructions, the exact forms, the pro-rata rule trap, the HSA receipt strategy, and how to check if your plan supports the Mega Backdoor Roth.

Subscribe to The HENRY Plan and start with Step 4: The Backdoor Roth IRA — The $7,000 Loophole You're Probably Missing.

Disclaimer: This is educational content, not financial advice. Tax laws change. Numbers cited reflect 2025 limits. Verify current limits with the IRS.