Mega Backdoor Roth vs. EF/Taxable

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Topic Author
quasiindex
Posts: 17
Joined: Thu Mar 16, 2017 11:22 am

Mega Backdoor Roth vs. EF/Taxable

Post by quasiindex »

My employer recently added the ability to contribute after-tax amounts to our 401k plan. Last year, I contributed $6k in after-tax and was able to perform an in-plan rollover and roll the amounts into a Roth 401K. This year, I am forecasting that I can max out my traditional 401K, Roth IRA and HSA as well as contribute ~$6K to my taxable account which serves as my EF and will also be able to contribute about $30k in additional money as an after-tax contribution (which I will be able rollover into the Roth 401k).

My question centers around whether I should be contributing this money and rolling into to the Roth 401K or if I should just beef up my EF. I am thinking that it is better to increase my liquid assets but it is tempting for me to utilize this additional Roth space which is a rare opportunity. I am also aware that there is a more complicated calculation that must be performed in order to calculate when you can withdraw rollover Roth contributions. Additionally, I am thinking it may be better for me to have some money in taxable index funds which will benefit from LTCG treatment and can also be tax-loss harvested and thus not that tax-inefficient.

I also would like to know if I am investing too heavily in retirement oriented accounts and not enough in liquid assets which can be used for a potential downpayment or any other more pressing needs in the nearer term future.

Summary:
Age: 26
Income: $150K
Marginal Federal Tax Rate: 24% (also live in NYC)
Traditional 401K Balance: $52K
Roth 401K Balance: $6K
401K Loan: I can also borrow up to 50% of the 401K balance or $50K (whichever is greater) for liquidity if needed
Employer Match: $2.5K per year
Roth IRA: $27K (can take out $17K in regular contributions for liquidity if needed)
Emergency Fund: $13k invested in VMMXX
Debt: $0

Thank you!
terran
Posts: 1934
Joined: Sat Jan 10, 2015 10:50 pm

Re: Mega Backdoor Roth vs. EF/Taxable

Post by terran »

Personally, I would max out all tax advantaged space before investing in taxable, even to the extent of considering a Roth IRA to be my emergency fund. Worst case: you have an emergency and need to withdraw from Roth to cover it (which you can do up to the contributions, not gains, without penalty) and you have have the same in Roth as if you'd kept your emergency fund in taxable. Best case: you don't have an emergency and you have more in Roth than if you'd kept your emergency fund in taxable.

It sounds like you're comfortable investing your emergency which I'm not, so I would have any Roth balance I consider my emergency fund invested in something with low volatility, but that doesn't really matter for this discussion. Where the money is (Roth or taxable) is independent from what it's invested in.

You might find this to be a useful read: https://www.bogleheads.org/wiki/Roth_IR ... gency_fund
Topic Author
quasiindex
Posts: 17
Joined: Thu Mar 16, 2017 11:22 am

Re: Mega Backdoor Roth vs. EF/Taxable

Post by quasiindex »

Thank you for the input! Does anyone else have an opinion?
sailaway
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Joined: Fri May 12, 2017 1:11 pm

Re: Mega Backdoor Roth vs. EF/Taxable

Post by sailaway »

terran's comments basically follow the normal investment order, so I doubt that there will be much argument.

I think most people would consider a MM fund a cash equivalent, and be fine with it as a location for emergency funds. However, between the expense ratio and actual returns of this particular MM, I am not sure why you would take any risk over putting it in a high yield savings account, but allow that I may be missing something about taxes.
lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Mega Backdoor Roth vs. EF/Taxable

Post by lakpr »

I have the same income as you, work in NY too. I would definitely contribute all I can to the after tax 401k and do in plan Roth rollover, even if I have to, in Dave Ramsey’s words, “eat Rice and beans, then beans and rice” all year long. With 150k income, I would be looking to hit that $56k max between my pretax, employer match and after-tax.
megabad
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Joined: Fri Jun 01, 2018 4:00 pm

Re: Mega Backdoor Roth vs. EF/Taxable

Post by megabad »

quasiindex wrote: Sun Apr 28, 2019 11:16 am My question centers around whether I should be contributing this money and rolling into to the Roth 401K or if I should just beef up my EF.

I also would like to know if I am investing too heavily in retirement oriented accounts and not enough in liquid assets which can be used for a potential downpayment or any other more pressing needs in the nearer term future.

(also live in NYC)

Roth IRA: $27K (can take out $17K in regular contributions for liquidity if needed)
Emergency Fund: $13k invested in VMMXX
How many months of expenses is $13k for someone living in NYC? I would be inclined to fund all tax advantaged accounts first given your very high income tax rates, but I would want to make sure you could survive for a little while if you lost your job. You mention a downpayment as well. I would typically hold this in a taxable account personally. If you wanted access to megabackdoor monies early, you would likely want to do the Roth IRA rollover flavor megabackdoor vs the in-plan flavor.
Topic Author
quasiindex
Posts: 17
Joined: Thu Mar 16, 2017 11:22 am

Re: Mega Backdoor Roth vs. EF/Taxable

Post by quasiindex »

Thank you all for the replies. $13K equates to about 5-6 months for me and I am in a countercyclical job (i.e. our business picks up when the economy does poorly).

On thinking this further, my question really gets to the philosophy of how I should try to allocate between a more liquid taxable investment account vs. trying to maximize the more illiquid and tax-friendly space in the after-tax Roth 401K. I am starting to get a little concerned that I may be locking too much money up in retirement-oriented accounts when I am only 26 and these after-tax Roth 401K contributions will be harder to access (e.g. the 5-year rollover rules, etc) vs. potentially having the money accessible for opportunities as they arise (such as a downpayment for an apartment in NYC).
aristotelian
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Re: Mega Backdoor Roth vs. EF/Taxable

Post by aristotelian »

At age 26, you have a lot to gain from growth of Roth contributions. I would go for the mega Roth with any funds you don't need to be kept liquid.
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jjunk
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Location: Seattle

Re: Mega Backdoor Roth vs. EF/Taxable

Post by jjunk »

OOC how do people feel about this (AT 401K vs. taxable) if you're 45 and 4-5yrs from fully retiring? I've been betting that the money in taxable is the better choice since I'll need it to get to 59.5++ but maybe I'm wrong?
lakpr
Posts: 7144
Joined: Fri Mar 18, 2011 9:59 am

Re: Mega Backdoor Roth vs. EF/Taxable

Post by lakpr »

jjunk wrote: Mon May 06, 2019 6:15 pm OOC how do people feel about this (AT 401K vs. taxable) if you're 45 and 4-5yrs from fully retiring? I've been betting that the money in taxable is the better choice since I'll need it to get to 59.5++ but maybe I'm wrong?
After tax still wins because you can roll it over to a Roth IRA when you retire (separate from the employer); once rolled over, it is treated as a regular Roth contribution to your Roth IRA. The Roth withdrawal rules apply, which suggests that withdrawal of contributions is tax free
miket29
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Re: Mega Backdoor Roth vs. EF/Taxable

Post by miket29 »

quasiindex wrote: Sun Apr 28, 2019 11:16 am 401K Loan: I can also borrow up to 50% of the 401K balance or $50K (whichever is greater) for liquidity if needed
Be cautious about using this. If you leave your job for any reason, even if it is due to a layoff, the loan must be repaid by April of the following year. See https://www.creditkarma.com/tax/i/401k- ... oan-repay/
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Earl Lemongrab
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Re: Mega Backdoor Roth vs. EF/Taxable

Post by Earl Lemongrab »

miket29 wrote: Mon May 06, 2019 10:25 pm
quasiindex wrote: Sun Apr 28, 2019 11:16 am 401K Loan: I can also borrow up to 50% of the 401K balance or $50K (whichever is greater) for liquidity if needed
Be cautious about using this. If you leave your job for any reason, even if it is due to a layoff, the loan must be repaid by April of the following year. See https://www.creditkarma.com/tax/i/401k- ... oan-repay/
October of the following year. It's due date plus extensions.
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