401k Post Tax vs Brokerage Question

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
infinitix
Posts: 20
Joined: Thu Jan 25, 2018 2:09 pm

401k Post Tax vs Brokerage Question

Post by infinitix » Thu Nov 08, 2018 8:48 am

Hi All,

I am looking for some guidance on how I should focus my future contributions. I am currently 29.

Planned 2019 Contributions
401k - $19,000 Pre-Tax; $5k Post-Tax
HSA - $3,500
Roth IRA - $6,000 via Backdoor
Taxable Brokerage - $1k/mos

I just learned that my employer allows post-tax 401k contributions up to the total contribution limit, and allows for in-service distributions of post-tax dollars to an IRA. My ultimate goal is to eventually max out total 401k contributions and annually distribute post-tax contributions to my Roth IRA for mega backdoor conversions.

Until my income can fully support that, would it be more beneficial to reduce my taxable brokerage contributions and increase my 401k? It seems to me the best move to grow my Roth IRA for tax-free growth. But am I not considering any implications to that strategy?

Thanks!

PFInterest
Posts: 2611
Joined: Sun Jan 08, 2017 12:25 pm

Re: 401k Post Tax vs Brokerage Question

Post by PFInterest » Thu Nov 08, 2018 9:01 am

mega backdoor is preferable to taxable for retirement savings.

retiredjg
Posts: 34219
Joined: Thu Jan 10, 2008 12:56 pm

Re: 401k Post Tax vs Brokerage Question

Post by retiredjg » Thu Nov 08, 2018 9:18 am

After-tax rolled out to Roth is preferable to taxable unless you need more liquidity. For a short term goal, I'd probably just use taxable.

infinitix
Posts: 20
Joined: Thu Jan 25, 2018 2:09 pm

Re: 401k Post Tax vs Brokerage Question

Post by infinitix » Thu Nov 08, 2018 10:20 am

Thanks! Just wanted to make sure I wasn't missing some fine print implication. I appreciate the quick replies.

2cents2
Posts: 330
Joined: Sun Mar 02, 2014 11:31 am

Re: 401k Post Tax vs Brokerage Question

Post by 2cents2 » Thu Nov 08, 2018 10:40 am

There could be a couple of potential downsides depending on what your plans are for the $$. You would not be able to take your Roth earnings penalty free if you needed the money prior to 59.5. Also, you would not be able to tax loss harvest if you had any losses.

infinitix
Posts: 20
Joined: Thu Jan 25, 2018 2:09 pm

Re: 401k Post Tax vs Brokerage Question

Post by infinitix » Thu Nov 15, 2018 11:57 am

2cents2 wrote:
Thu Nov 08, 2018 10:40 am
There could be a couple of potential downsides depending on what your plans are for the $$. You would not be able to take your Roth earnings penalty free if you needed the money prior to 59.5. Also, you would not be able to tax loss harvest if you had any losses.
Thanks for the input! I did not consider the inability to tax loss harvest in a Roth IRA.

However, Re: penalty on withdrawals - I thought early withdrawals from a Roth IRA are penalty free if withdrawn from your contributions (first), with the penalty only being hit against earnings before turning age 59.5? So if my mega backdoor conversions are periodic yearly and stack up a sizable portion and withdrawn >5 years from the contribution date, then early withdrawals (i.e., I retire early before 59.5) are tax and penalty free. And even if I withdraw the after-tax dollars from the mega backdoor within 5 years from date of contribution, I would only incur a 10% penalty on the earnings.

Am I misinterpreting the Roth IRA Withdrawal IRS Rules?

User avatar
JoMoney
Posts: 6150
Joined: Tue Jul 23, 2013 5:31 am

Re: 401k Post Tax vs Brokerage Question

Post by JoMoney » Thu Nov 15, 2018 12:02 pm

infinitix wrote:
Thu Nov 15, 2018 11:57 am
2cents2 wrote:
Thu Nov 08, 2018 10:40 am
There could be a couple of potential downsides depending on what your plans are for the $$. You would not be able to take your Roth earnings penalty free if you needed the money prior to 59.5. Also, you would not be able to tax loss harvest if you had any losses.
Thanks for the input! I did not consider the inability to tax loss harvest in a Roth IRA.

However, Re: penalty on withdrawals - I thought early withdrawals from a Roth IRA are penalty free if withdrawn from your contributions (first), with the penalty only being hit against earnings before turning age 59.5? So if my mega backdoor conversions are periodic yearly and stack up a sizable portion and withdrawn >5 years from the contribution date, then early withdrawals (i.e., I retire early before 59.5) are tax and penalty free. And even if I withdraw the after-tax dollars from the mega backdoor within 5 years from date of contribution, I would only incur a 10% penalty on the earnings.

Am I misinterpreting the Roth IRA Withdrawal IRS Rules?
You got it right, which is also what 2cents2 said "You would not be able to take your Roth earnings penalty free"

Also, if you withdrew the earnings before 59.5, you would have the penalty as well as income taxes on them.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Olemiss540
Posts: 594
Joined: Fri Aug 18, 2017 8:46 pm

Re: 401k Post Tax vs Brokerage Question

Post by Olemiss540 » Thu Nov 15, 2018 12:03 pm

The responding poster meant/stated that the EARNING on the Roth contributions could not be removed penalty free. Contributions can be removed early tax and penalty free.

I would make sure I had a good taxable buffer (EF or investments) and then go all out of after tax contributions. You decide how much buffer is enough for short term needs, not us.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

infinitix
Posts: 20
Joined: Thu Jan 25, 2018 2:09 pm

Re: 401k Post Tax vs Brokerage Question

Post by infinitix » Thu Nov 15, 2018 1:05 pm

Got it! Totally read right over the 'earnings' part of his post :)

dkb140
Posts: 66
Joined: Mon May 21, 2018 3:30 pm

Re: 401k Post Tax vs Brokerage Question

Post by dkb140 » Thu Nov 15, 2018 6:37 pm

infinitix wrote:
Thu Nov 08, 2018 8:48 am
Planned 2019 Contributions
401k - $19,000 Pre-Tax; $5k Post-Tax
HSA - $3,500
Roth IRA - $6,000 via Backdoor
Taxable Brokerage - $1k/mos

I just learned that my employer allows post-tax 401k contributions up to the total contribution limit, and allows for in-service distributions of post-tax dollars to an IRA. My ultimate goal is to eventually max out total 401k contributions and annually distribute post-tax contributions to my Roth IRA for mega backdoor conversions.

Until my income can fully support that, would it be more beneficial to reduce my taxable brokerage contributions and increase my 401k? It seems to me the best move to grow my Roth IRA for tax-free growth. But am I not considering any implications to that strategy?
Great work at 29, sounds like you're on-track!

Assuming you have a fully funded emergency fund, no high-interest debt, and no immediate short term needs coming up, then I would shift that $1k/mo taxable up to $17k post-tax to be mega-backdoor-ed into your Roth IRA. If your plan allows more than 1 in-service distribution per year (mine allows 2) then I would mega-backdoor more frequently to minimize the taxable earnings on the after-tax contributions.

Keep it up!

Post Reply