When You Earn $1 Million or More, the Rules of Personal Finance Change
From a financial planning perspective, there is nothing magical that happens once an individual or couple breaches the $1 million mark with respect to their gross income. There is no special million-dollar tax bracket, nor does the IRS suddenly hand you a different rulebook once the first seven-figure W-2 arrives.
In fact, by the time someone earns $1 million in a calendar year, they have already crossed most of the income thresholds that materially affect their taxes. However, for senior leaders who reach this level of compensation, the basic rules of personal finance change entirely. This is because the number of tools available to you—aside from saving and investing—becomes increasingly limited.
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At lower income levels, many planning challenges are likely centered around accumulation. But at $1 million or more of annual compensation, the challenge increasingly becomes figuring out how to convert today’s paychecks into a diversified, sustainable income stream in the future.
For example, the 401(k) account that once served as the flagship of your retirement strategy may start to feel surprisingly small when considering how you will maintain a similar level of spending in retirement. Also, tax planning becomes less about finding deductions and more about deciding which year income should be recognized in.
Taxes Become a Year-Round Planning Exercise
Once your income reaches $1 million, it becomes increasingly important to distinguish between your gross compensation and understand what an additional dollar of income is actually worth to you.
The final few hundred thousand dollars are considerably less valuable to you than the first few. That is because, at the time of this writing, the highest federal income tax rate of 37% begins at $640,600 of taxable income for single filers and $768,700 for married couples filing jointly.
So, someone earning $1 million in W-2 compensation will have a significant portion of their income taxed at the highest federal marginal rate. And if they live in a high tax state like California or New York, the combined percentage climbs closer to 50%. That is before accounting for the 0.9% Additional Medicare Tax, which applies to wages above $200,000 for single filers and $250,000 for married couples filing jointly.
Additionally, once your earned income reaches $1 million, the tax treatment of your investment portfolio becomes more consequential. High-income investors are generally subject to the 20% federal long-term capital gains rate on any applicable gains. But it does not stop there. They can also be subject to the 3.8% Net Investment Income Tax, which means that a high-income investor's effective federal tax rate on certain long-term capital gains can reach 23.8% before state taxes are considered.
That changes the way a taxable investment portfolio should be evaluated and makes the location of tax inefficient assets matter even more. Thus, particular focus should not only be placed on how much you end up paying in taxes, but when you pay them. Once a person reaches the highest marginal tax bracket, the objective should not necessarily be to avoid taxes at all costs. Rather, it should be about controlling when those taxes are paid.
The Impact of the 401(k) Becomes Smaller
For most workers, the 401(k) is the centerpiece of a well-crafted retirement plan. But for someone consistently earning more than $1 million each year, it is likely only one piece of a much larger puzzle. That is because this year, a worker younger than 50 is allowed to defer $24,500 of their compensation into a 401(k)—which only represents 2.45% of the income of a person earning $1 million annually.
But for an executive accustomed to living on a seven-figure income, this creates an enormous retirement savings gap. At that level, a person cannot reasonably expect contributions to a traditional 401(k) alone to accumulate enough capital to replace anything close to their current lifestyle in retirement. Subsequently, as income rises, accumulating assets within a taxable brokerage account tends to become increasingly important.
Additionally, assuming the employer's plan allows after-tax contributions and either in-plan Roth conversions or in-service withdrawals, the mega backdoor Roth strategy becomes even more appealing. For 2026, the difference between the $24,500 employee deferral limit and the $72,000 overall plan contribution limit can create additional savings capacity for some highly compensated employees. That additional capacity can become enormously valuable when traditional retirement accounts represent such a small percentage of annual income.
And when it is offered, this is where electing to participate in a non-qualified deferred compensation (NQDC) plan and/or supplemental executive retirement plan begins to matter more. Unlike a traditional 401(k), an NQDC plan may allow an executive to defer a substantial portion of salary or bonus without being constrained by the standard 401(k) employee contribution limit.
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Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your tax and legal advisors before taking any action that could have tax and legal consequences.
Investments in securities and insurance products are:
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