5 Tax Mistakes HENRYs Make Before 40 (That Cost $100K+)
If you are a high-earning millennial, $250,000 or more, and you are under 40, there are five tax mistakes you are almost certainly making right now. Over the next 20 years, these mistakes can quietly cost you six figures. And your CPA is probably not going to bring them up.
Nothing in this post is personalized advice. These are strategies and concepts to discuss with your own CPA and financial advisor before taking any action. All numbers used are hypothetical and for educational purposes only.
Why Your CPA Probably Won't Tell You This
Most CPAs are in compliance mode, not planning mode. Their job is filing what happened. These five mistakes are about what did not happen.
That is not a knock on CPAs. Compliance is important, and most CPAs do it well. But if nobody is proactively looking at your tax picture before the year closes, you are leaving decisions unmade. And unmade decisions have a cost.
Ignoring the HSA
If you are on a high-deductible health plan and you have access to an HSA, and you are treating it like a glorified FSA, meaning you put money in, use it on medical bills this year, and zero it out, you are missing what is widely considered the most tax-advantaged account in the US tax code.
Here is what an HSA can do if you max it and leave it alone:
That is a triple tax advantage. No other account in the US tax code has all three.
For a high-earning family in a high marginal tax bracket, maxing the HSA each year, investing it rather than leaving it in cash, and paying out-of-pocket for current medical expenses can build a potentially significant tax-advantaged asset over 20 or 30 years.
Check whether you have an HDHP. Check whether your HSA provider lets you invest. And consider whether maxing the HSA and leaving it alone for decades makes sense in your plan. That is a conversation for your advisor.
Skipping the Backdoor Roth IRA
If you are making $250,000 or more, your income phases you out of direct Roth IRA contributions. So you looked at the Roth, said you could not do it, and moved on.
The backdoor Roth is a strategy that has been allowed for over a decade and is widely used. You make a non-deductible contribution to a Traditional IRA and then convert it to a Roth. There is no income limit on either step.
If you and your spouse are each doing a backdoor Roth every year for 20 years, the total Roth dollars you accumulate can be substantial. Roth money is the most powerful money you can hold in retirement: it grows tax-free and has no required minimum distributions.
If you have existing pre-tax IRA balances, such as an old rollover from a 401(k), the backdoor Roth math gets complicated and potentially expensive. This is a conversation with your advisor and CPA before you do anything.
Work with your CPA and financial advisor to evaluate whether a backdoor Roth makes sense given your existing IRA balances and tax situation. Do not just look it up and go. See the disclosures at the bottom of this post.
Missing the Mega Backdoor Roth
This one is less well-known and more powerful. And it is only available in a 401(k) plan that specifically allows two things: after-tax contributions beyond the pre-tax limit, and either in-service withdrawals or in-plan Roth conversions.
Not every plan does. But many plans at large employers, especially in tech, large law firms, and some medical groups, do.
If your plan allows it, you can contribute additional after-tax dollars beyond the regular 401(k) limit and then convert that money to Roth. Over a decade, for a high earner who can fund it, this is one of the most powerful tax-advantaged wealth-building tools available. It flies under the radar because your HR website does not have a flashing banner that says to do this.
Call your 401(k) administrator and ask two questions: Does the plan allow after-tax contributions beyond the pre-tax limit? And does the plan allow in-service Roth conversions or in-plan Roth rollovers? If the answer to both is yes, bring it to your advisor.
Wrong Business Structure for the Income
This one is for the business owners and self-employed. If you are a high-earning millennial entrepreneur, the way your business is structured, whether sole proprietor, single-member LLC, S-corp, or partnership, has a bigger impact on your tax bill than most people realize.
A lot of high-earning founders I meet are still operating as a single-member LLC or sole prop, paying self-employment tax on every dollar of profit, because that is how they set things up when they started and nobody ever revisited it.
Depending on your income level, industry, and state, an S-corp election can potentially reduce the portion of income subject to self-employment tax by paying yourself a reasonable salary and taking the rest as distributions. Reasonable salary is a real term with real IRS scrutiny behind it. This is not a DIY optimization.
There is also the QBI deduction, the qualified business income deduction, which is meaningful for certain pass-through businesses. It phases out at higher income and is limited for certain service businesses. The planning opportunities are specific to your situation.
If your business makes real money and you have never sat down with a CPA who does strategic planning, not just tax prep, you are probably leaving money on the table every single year. Over a 20-year career, that can be a six-figure number.
Treating Tax as an April Problem
This is the mindset mistake, and it is the one that causes the other four.
Most high-earning millennial households treat tax as something you deal with in March and April. You gather forms, hand them to the CPA, the CPA does the math, you either pay or get refunded, and then you forget about it until next year.
That is tax compliance. That is not tax planning.
Tax planning happens in October and November, before the year closes, when you still have time to adjust contributions, harvest losses, time income, do Roth conversions, make charitable moves, and line up next year's structure. By April, the year is done. The decisions are made. The savings are gone.
If the only tax conversation you have every year is about what happened, you are playing defense. The real savings come from playing offense.
Put a recurring 60-minute calendar block on your CPA's calendar for November. Call it a year-end planning check. If your CPA does not do planning, that is a signal to find one who does, or to bring in a financial planner who can sit between you and your CPA.
Quick Recap: The Five Mistakes
| Mistake | The Fix |
|---|---|
| 1. Ignoring the HSA | Max it, invest it, leave it alone. Stop using it as a flex account. |
| 2. Skipping the backdoor Roth IRA | Make a non-deductible IRA contribution and convert it annually. Watch the pro-rata rule. |
| 3. Missing the mega backdoor Roth | Ask your 401(k) administrator if after-tax contributions and in-plan Roth conversions are allowed. |
| 4. Wrong business structure | Work with a CPA who does planning, not just prep, to review your entity structure annually. |
| 5. Treating tax as an April problem | Schedule a year-end planning meeting with your CPA or advisor every November. |
Frequently Asked Questions
What is a HENRY in personal finance?
HENRY stands for High Earner, Not Rich Yet. It describes high-income professionals, typically earning $250,000 or more, who feel financially stretched despite their income. Common causes include high taxes, student loans, childcare, a mortgage, and lifestyle inflation that outpaces their savings rate.
What is the HSA triple tax advantage and why does it matter?
An HSA offers three tax benefits in one account: contributions go in pre-tax, the money grows tax-free, and withdrawals for qualified medical expenses come out tax-free. No other account in the US tax code offers all three. For high earners in a high marginal tax bracket, maxing an HSA annually and investing it rather than spending it down can build a substantial tax-advantaged asset over decades.
What is the backdoor Roth IRA and how does it work?
The backdoor Roth IRA is a two-step strategy for high earners who are phased out of direct Roth IRA contributions. First, you make a non-deductible contribution to a Traditional IRA. Then you convert that balance to a Roth IRA. There is no income limit on either step. The main complication is the pro-rata rule, which can create a tax liability if you have existing pre-tax IRA balances. Work with your CPA before executing this strategy.
What is the mega backdoor Roth and who can use it?
The mega backdoor Roth allows certain 401(k) participants to contribute additional after-tax dollars beyond the standard pre-tax limit, then convert those dollars to Roth. It requires your plan to allow after-tax contributions and either in-service withdrawals or in-plan Roth conversions. Not every employer plan offers both. Check with your plan administrator to see if you are eligible.
When should high earners be doing tax planning?
October and November, before the calendar year closes. That is when you still have time to make meaningful adjustments: increase retirement contributions, harvest tax losses, time income or deductions, execute Roth conversions, and set up next year's structure. By the time April arrives, the decisions are already made. A year-end planning meeting with your CPA or financial advisor every fall is one of the highest-ROI hours you can spend.
How does business structure affect taxes for high-income entrepreneurs?
The structure of your business determines how your income is taxed, including whether you owe self-employment tax on all of your profit or just a portion of it. A sole proprietorship or single-member LLC pays self-employment tax on all net profit. An S-corp election can potentially reduce that exposure by splitting income between a reasonable salary and distributions, though the rules around reasonable compensation have real IRS scrutiny. Work with a CPA who does strategic planning, not just return prep.
(22-LPL) Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
(38-LPL) A plan participant leaving an employer typically has four options (and may engage in a combination of these options): 1. Leave the money in their former employer's plan, if permitted; 2. Roll over the assets to their new employer's plan, if one is available and rollovers are permitted; 3. Roll over to an IRA; or 4. Cash out the account value.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. LPL Financial does not provide legal advice or services, or tax advice or services.
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