The High Earner's Tax Playbook: Every Legal Lever for W-2 Employees

Making $300,000 or more as a W-2 employee puts you in a frustrating position. You’re too rich for most deductions and credits but you don’t have the business-owner playbook of writing off expenses, choosing your entity structure, or timing your income.

Here’s what most people won’t tell you: W-2 employees at $300K+ still have access to 15+ legal tax reduction strategies that can save $30,000-$100,000+ per year. The problem isn’t a lack of options — it’s that nobody puts them all in one place.

This guide is your complete order of operations. Follow it top to bottom, checking off each strategy that applies to you.

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The Tax Reduction Order of Operations

Think of tax optimization like filling buckets. You fill the most impactful, lowest-effort buckets first, then work your way down. Here’s the sequence:

Level 1: Pre-Tax Retirement Accounts (highest impact, easiest)
  └── 401(k) → HSA → Catch-up contributions

Level 2: Backdoor Strategies (high impact, moderate complexity)
  └── Backdoor Roth IRA → Mega Backdoor Roth

Level 3: Charitable Optimization (high impact if you give)
  └── Donor-Advised Fund → Appreciated stock donations → Bunching

Level 4: Investment Tax Management (ongoing, compounds over time)
  └── Tax-loss harvesting → Asset location → Municipal bonds

Level 5: Deduction & Credit Optimization (situational)
  └── 529 plans → SALT strategy → Dependent care FSA

Level 6: Structural Strategies (highest complexity)
  └── Self-employment income → Solo 401(k) → QBI deduction

Let’s walk through each level.

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Level 1: Pre-Tax Retirement Accounts

These are the foundation. If you’re not doing these, nothing else matters.

401(k): Your First $24,500 in Tax Savings

The 401(k) is the single easiest way to reduce your taxable income. At a 37% federal rate, maxing out saves you $9,065 in federal taxes alone — more with state taxes.

Detail	2026 Amount
Employee contribution limit	$24,500
Catch-up contribution (age 50+)	+$8,000
Super catch-up (ages 60-63)	+$11,250
Employer match	Varies (doesn’t count against your limit)
Total plan limit (all sources)	$72,000 ($80,000 if 50+)

Action: Log into your benefits portal and set your contribution to $24,500/year (or $32,500 if 50+). Choose traditional if you’re in the 35%+ bracket.

HSA: The Most Tax-Advantaged Account in Existence

If you have access to a High Deductible Health Plan, the HSA gives you something no other account does — a triple tax benefit: deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses.

Detail	2026 Amount
Individual coverage	$4,400
Family coverage	$8,750
Catch-up (age 55+)	+$1,000

The high-earner move: Don’t spend your HSA on current medical expenses. Pay out of pocket, invest your HSA in index funds, and let it compound for decades. You can reimburse yourself for any qualified expense at any time — even 20 years later. After age 65, withdrawals for any purpose are taxed like a traditional IRA (but medical withdrawals remain tax-free forever).

Action: Enroll in your employer’s HDHP during open enrollment. Max out the HSA. Change the investment allocation from money market to a low-cost index fund.

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Level 2: Backdoor Strategies

These strategies exist because Congress set income limits on direct contributions but left a loophole for conversions.

Backdoor Roth IRA: $7,500 Through the Back Door

If you earn too much to contribute to a Roth IRA directly ($168,000 single / $252,000 MFJ in 2026), the backdoor strategy lets you get money in anyway.

The process:

1. Contribute $7,500 to a non-deductible traditional IRA
2. Wait a day or two
3. Convert the entire balance to a Roth IRA
4. Report on Form 8606 when you file taxes

Critical warning — the pro-rata rule: If you have any pre-tax money in any traditional, SEP, or SIMPLE IRA, the conversion becomes partially taxable. The IRS aggregates all your IRAs.

The fix: Roll any pre-tax IRA money into your current employer’s 401(k) before doing the backdoor Roth. This zeros out your traditional IRA balance and makes the conversion tax-free.

Mega Backdoor Roth: The $30,000-$47,000+ Game Changer

This is the single most underutilized strategy for high-earning W-2 employees. The total 401(k) plan limit is $72,000, but most people only use $24,500 (employee) plus their employer match. The mega backdoor Roth fills the gap.

How it works:

$72,000   Total 401(k) plan limit
-$24,500  Your employee contributions
-$12,000  Employer match (example)
= $35,500  Room for after-tax contributions → convert to Roth

Requirements (ask HR these exact questions):

1. “Does our 401(k) plan allow after-tax contributions?” (not the same as Roth 401(k))
2. “Does the plan allow in-service distributions or in-plan Roth conversions?”

If the answer to both is yes, you can contribute and convert that extra $35,500 into a Roth account every year.

Most Fortune 500 and large tech companies support this. Google, Meta, Apple, Amazon, Microsoft, and many others offer mega backdoor Roth capability. If yours doesn’t, it’s worth lobbying HR — the administrative cost is minimal.

Action: Call HR or your plan administrator this week. If eligible, set up after-tax contributions immediately and arrange for automatic conversions.

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Level 3: Charitable Optimization

If you give to charity at all, these strategies can dramatically increase the tax benefit of your giving.

Donor-Advised Fund (DAF): The Bunching Strategy

The 2026 standard deduction is $15,350 (single) or $30,700 (married). With the $10,000 SALT cap, many high earners can’t itemize unless they bunch charitable donations.

How bunching works:

• Instead of giving $15,000/year to charity, give $75,000 every 5 years to a DAF
• In the bunching year, you itemize and deduct $75,000
• In the other 4 years, you take the standard deduction
• The DAF distributes grants to your chosen charities on whatever schedule you want

The math:

Strategy	5-Year Deduction Total	Tax Savings (37% bracket)
$15,000/year, standard deduction each year	$0 additional (below standard deduction threshold)	$0
$75,000 in Year 1, standard deduction Years 2-5	~$44,300 additional ($75K - $30.7K)	~$16,400

Extra power move: Fund the DAF with appreciated stock instead of cash. You avoid capital gains tax on the appreciation AND get the full fair market value deduction. This is one of the most tax-efficient moves available to any taxpayer.

For a complete DAF strategy guide, see our Donor-Advised Fund Strategy for High Earners article.

Qualified Charitable Distributions (Age 70½+)

If you’re 70½ or older, you can donate up to $105,000 directly from your IRA to charity. This counts toward your Required Minimum Distribution but isn’t included in your income — which can keep you below thresholds for Medicare surcharges and other phaseouts.

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Level 4: Investment Tax Management

These strategies don’t reduce your income today, but they compound over decades and can save hundreds of thousands over a lifetime.

Tax-Loss Harvesting

When investments in your taxable account decline in value, you can sell them to realize losses that offset gains — and up to $3,000 of ordinary income per year. Unused losses carry forward indefinitely.

The high-earner advantage: At a 37% federal + 3.8% NIIT + state tax rate, a $10,000 harvested loss saves $4,000+ in taxes. Over a career, systematic tax-loss harvesting in a $500K+ taxable portfolio can add 0.5-1.5% to annual after-tax returns.

Key rules:

• Wash sale rule: You can’t buy a “substantially identical” security within 30 days before or after the sale
• Workaround: Sell the S&P 500 ETF (VOO) and immediately buy a total market ETF (VTI) — different fund, similar exposure

Asset Location: Put the Right Investments in the Right Accounts

Where you hold investments matters as much as what you hold.

Account Type	Best Assets to Hold	Why
Tax-deferred (401k, trad IRA)	Bonds, REITs, high-dividend stocks	Income taxed at ordinary rates anyway
Tax-free (Roth IRA, Roth 401k)	Highest-growth investments	Maximize the tax-free compounding
Taxable brokerage	Index funds, growth stocks, munis	Benefit from lower capital gains rates

Municipal Bonds

For high earners in states like California or New York, the tax-equivalent yield of municipal bonds can be compelling. A 4% muni bond is equivalent to a 7%+ taxable bond when you factor in federal (37%), state (13.3% CA), and NIIT (3.8%) taxes.

Action: In your taxable brokerage account, consider allocating your bond position to a state-specific or national municipal bond fund.

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Level 5: Deduction & Credit Optimization

These are situational but can provide meaningful savings when they apply.

529 Plan Contributions

While there’s no federal tax deduction for 529 contributions, over 30 states offer state tax deductions. Some examples:

State	Deduction Limit (MFJ)	Tax Savings
New York	$10,000	~$680
Illinois	$20,000	~$990
Colorado	Unlimited	Varies

Beyond the state deduction, 529 plans offer tax-free growth and withdrawals for education. A married couple can superfund up to $190,000 per beneficiary (5 years of gift exclusions).

For a deep dive, see our 529 Plans for High Earners guide.

Dependent Care FSA

If you have children under 13, the Dependent Care FSA lets you set aside $5,000 pre-tax ($2,500 if married filing separately) for childcare expenses. At a 37% federal rate, that’s $1,850 in savings. Not life-changing, but it takes 5 minutes to enroll.

SALT Strategy Under the New Rules

The SALT deduction is capped at $10,000 (phasing up to $40,000 between $500K-$600K MAGI under new legislation). For most high earners, this effectively means the SALT deduction provides limited benefit. However:

• If your MAGI is above $600K, you may qualify for a larger SALT deduction under the new phase-up rules
• Some states offer pass-through entity tax elections (PTE) that bypass the SALT cap for business owners
• Property tax timing (prepaying or deferring) can optimize which year you claim the deduction

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Level 6: Structural Strategies

These require more setup but can unlock significant additional savings.

Side Income and Self-Employment

Even modest self-employment income ($10,000-$50,000 from consulting, freelancing, or a side business) unlocks:

• Solo 401(k): Up to $72,000 in additional retirement contributions (the $24,500 employee limit is shared with your W-2 401(k), but employer contributions are per-plan)
• QBI deduction: 20% deduction on qualified business income (subject to income limits and W-2/capital thresholds)
• Business expense deductions: Home office, equipment, travel, professional development

See our Maximizing Retirement Contributions guide for the full breakdown of Solo 401(k) vs. SEP IRA.

Strategic Charitable Giving with Appreciated Stock

If you hold concentrated stock positions or have large unrealized gains, donating appreciated shares to a DAF eliminates the capital gains tax entirely while giving you a fair market value deduction. This is especially powerful for RSU holders — see our RSU Tax Strategies guide and Concentrated Stock Diversification playbook.

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The Complete Checklist: What to Do and When

January

• Set 401(k) contribution to maximum ($24,500 or $32,500 if 50+)
• Enroll in HDHP and open/fund HSA if not already done
• Make backdoor Roth IRA contribution ($7,500)
• Set up after-tax contributions for mega backdoor Roth (if available)
• Review prior year for tax-loss harvesting opportunities

Quarterly

• Verify 401(k) contributions are on track (you want to spread across all pay periods to capture employer match)
• Review taxable portfolio for tax-loss harvesting opportunities
• Make estimated tax payments if you have non-W-2 income (see our estimated tax payments guide)

October-December

• Confirm you’ll hit 401(k) max by December 31
• Make charitable contributions (appreciated stock to DAF if bunching)
• Fund 529 plans for state tax deduction (deadline: December 31 in most states)
• Review capital gains and harvest any remaining losses
• Maximize Dependent Care FSA enrollment during open enrollment

Before April 15

• Complete backdoor Roth IRA if not done in January
• Fund HSA for prior year if not fully contributed
• Make Solo 401(k) or SEP IRA contributions for prior year

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Case Study: The Software Engineer at $450K Total Comp

Profile

• Name: Alex, age 35
• Role: Staff Software Engineer at a large tech company
• Total comp: $450,000 ($220K base + $230K RSUs vesting)
• Filing status: Married, spouse earns $80K
• Combined AGI: $530,000
• State: Washington (no state income tax)
• Children: One (age 3)

Before Optimization

Alex was maxing his 401(k) at $24,500 and his spouse was contributing $12,000 to her 401(k). That’s it. They used TurboTax and took the standard deduction.

Tax bill: ~$142,000 (federal + FICA)

After Optimization

Strategy	Annual Amount	Tax Savings
Alex’s 401(k) (traditional)	$24,500	$9,065
Spouse’s 401(k) (traditional)	$24,500	$8,575
Alex’s mega backdoor Roth	$35,500	$0 now, tax-free growth
Both backdoor Roth IRAs	$15,000	$0 now, tax-free growth
HSA (family)	$8,750	$3,238
Dependent Care FSA	$5,000	$1,850
DAF with appreciated RSU shares ($50K, basis $20K)	$50,000 donated	$18,500 deduction + $11,400 cap gains avoided
Tax-loss harvesting (taxable account)	$15,000 in losses	$6,132
529 for child	$19,000	$0 (WA has no state tax)
Total tax-advantaged / sheltered	$197,250	~$58,760

Key Takeaways

1. The mega backdoor Roth added $35,500/year to Roth savings that Alex didn’t know existed until he asked HR one question.
2. Donating appreciated RSU shares to the DAF saved both income tax (deduction) and capital gains tax — double benefit.
3. Tax-loss harvesting during a market dip generated $15,000 in losses that offset RSU vesting gains.
4. Total first-year savings: ~$58,760 — and the Roth accounts will compound tax-free for 30+ years.

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Case Study: The Dual-Income HENRY Couple in New York

Profile

• Names: Maria (attorney, $310K) and David (finance, $275K)
• Combined income: $585,000
• Filing status: Married Filing Jointly
• State: New York (combined state + city tax ~12.7% on top marginal income)
• Children: Two (ages 6 and 9)
• Current strategy: Both max 401(k)s, otherwise nothing

The Optimization Plan

Strategy	Amount	Federal Savings (35%)	NY Savings (~12.7%)
Maria’s 401(k)	$24,500	$8,575	$3,112
David’s 401(k)	$24,500	$8,575	$3,112
David’s mega backdoor Roth	$28,000	Future tax-free	Future tax-free
Both backdoor Roth IRAs	$15,000	Future tax-free	Future tax-free
HSA (family)	$8,750	$3,063	$1,111
DAF bunching (5 years of giving)	$60,000	$21,000	$7,620
529 plans (2 kids, NY deduction)	$20,000	$0	$1,270
Tax-loss harvesting	$20,000 losses	$8,160 (incl. NIIT)	$2,540
Totals		~$49,373	~$18,765

Combined annual savings: ~$68,138

In New York, the state tax savings are almost as impactful as the federal savings. This couple saves nearly $70,000 per year by implementing every available strategy — and they’re still pure W-2 employees with no business.

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Common Mistakes High-Earning W-2 Employees Make

1. Not Asking HR About Mega Backdoor Roth

Over half of Fortune 500 companies offer this, but most employees don’t know to ask. Two questions to HR can unlock $30,000-$47,000+ in additional Roth savings per year.

2. Having Pre-Tax IRA Money When Doing Backdoor Roth

Old rollover IRAs, SEP IRAs, or SIMPLE IRAs trigger the pro-rata rule and make your backdoor Roth partially taxable. Solution: roll them into your 401(k) first.

3. Leaving HSA Money in Cash

Most HSA providers default to a money market or savings account earning 0.5%. Over 30 years, the difference between investing in index funds vs. cash in your HSA is hundreds of thousands of dollars.

4. Donating Cash Instead of Appreciated Stock

If you’re giving to charity and hold appreciated investments, donating the shares saves you capital gains tax AND gives you the full fair market value deduction. Donating $50,000 in stock with $20,000 basis saves an additional $11,400+ compared to selling, paying tax, and donating cash.

5. Ignoring Tax-Loss Harvesting

Market downturns are tax planning opportunities. Many high earners set and forget their taxable accounts, missing chances to harvest losses that could save $5,000-$20,000+ per year.

6. Not Adjusting W-4 Withholding

High earners with RSUs, bonuses, or spousal income often over-withhold or under-withhold. Review your W-4 annually — over-withholding is an interest-free loan to the IRS; under-withholding triggers penalties.

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The Bottom Line

You don’t need a business, a complicated entity structure, or a team of lawyers to significantly reduce your taxes as a high-earning W-2 employee. You need a system.

Start with Level 1 (401(k) + HSA), move to Level 2 (backdoor strategies), and layer on Levels 3-6 as each one is implemented. Most high earners can save $30,000-$100,000+ per year through these strategies — every year.

The cost of not acting? At a 40%+ combined tax rate, every $100,000 in unsheltered income costs you $40,000 in taxes that could be growing tax-free in your accounts instead.

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Related Resources

• Maximizing Retirement Contributions — Deep dive on stacking 401(k), mega backdoor, HSA, and Solo 401(k)
• RSU Tax Strategies — Managing equity compensation taxes
• Estimated Tax Payments Guide — Avoiding underpayment penalties
• 529 Plans for High Earners — Education savings optimization
• Tax Calculator — Model your specific tax situation