Mega Backdoor Roth or Taxable?

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dcg
Posts: 5
Joined: Wed Jul 31, 2019 1:40 pm

Mega Backdoor Roth or Taxable?

Post by dcg » Tue Oct 08, 2019 9:45 pm

My wife and I are hoping to retire when we are 50-55 (we are in our mid-30s). My question for the group is given this goal is it better to plow every extra dollar into our taxable account (100% VTSAX) or balance between the taxable and mega backdoor Roth?

I know there are options to withdraw from retirement accounts before 60 but it feels simpler to just save in the taxable to finance the pre-60 years.

We are already maxing out 401ks, regular backdoor Roth, emergency savings, 529s etc.

Happy to post the full portfolio review if that helps. Thanks in advance.

sharukh
Posts: 216
Joined: Mon Jun 20, 2016 10:19 am

Re: Mega Backdoor Roth or Taxable?

Post by sharukh » Tue Oct 08, 2019 10:11 pm

Mega back door will be equal to rollover. Rollover money can be with draw tax free and penalty free (not the gains) any time.

(assuming that there was no growth initially when it was rolled over) if there was any growth then you may have to pay penalty on that small growth part, but nottaxes


So choose mega back roth

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FiveK
Posts: 7538
Joined: Sun Mar 16, 2014 2:43 pm

Re: Mega Backdoor Roth or Taxable?

Post by FiveK » Wed Oct 09, 2019 12:48 am

dcg wrote:
Tue Oct 08, 2019 9:45 pm
My wife and I are hoping to retire when we are 50-55 (we are in our mid-30s). My question for the group is given this goal is it better to plow every extra dollar into our taxable account (100% VTSAX) or balance between the taxable and mega backdoor Roth?

I know there are options to withdraw from retirement accounts before 60 but it feels simpler to just save in the taxable to finance the pre-60 years.

We are already maxing out 401ks, regular backdoor Roth, emergency savings, 529s etc.

Happy to post the full portfolio review if that helps. Thanks in advance.
One could also posit that it is simpler to just do the mega backdoor Roth, thus avoiding the hassle of paying more taxes each year on the dividends, etc., thrown off by money in a taxable account.

BlueMoonXD
Posts: 6
Joined: Sat Sep 14, 2019 11:50 pm

Re: Mega Backdoor Roth or Taxable?

Post by BlueMoonXD » Wed Oct 09, 2019 4:19 am

If you have access to the mega backdoor Roth it seems advantageous to use it. You can withdraw the rollover contributions if needed, and in the meantime you will have the benefit of being able to adjust allocations as needed without concern for taxable events.

If you have significant retirement savings in traditional accounts you could also do a Roth conversion ladder for the 5-10 years before you can access your Roth money, allowing more of it to continue to grow.

lakpr
Posts: 2501
Joined: Fri Mar 18, 2011 9:59 am

Re: Mega Backdoor Roth or Taxable?

Post by lakpr » Wed Oct 09, 2019 5:34 am

When you say MBR, which flavor is it? Is it where you can roll it to an external Roth IRA, or where the money is in 401k as a Roth subaccount?

If it remains in the 401k account as my own MegaCorp plan allows, the money in Roth 401k is not accessible unless you leave the company.

I believe that if you roll over to external Roth IRA, each rollover to IRA will begin a fresh 5 year clock, just like it does for a Backdoor Roth.

Point being, unlike a taxable account, the money in MBR is not readily accessible. For this reason, make sure you have a beefier emergency fund than what you would normally have if you didn't have access to MBR. Say at least 1 year of expenses.

MikeG62
Posts: 2130
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: Mega Backdoor Roth or Taxable?

Post by MikeG62 » Wed Oct 09, 2019 6:31 am

dcg wrote:
Tue Oct 08, 2019 9:45 pm
My wife and I are hoping to retire when we are 50-55 (we are in our mid-30s). My question for the group is given this goal is it better to plow every extra dollar into our taxable account (100% VTSAX) or balance between the taxable and mega backdoor Roth?

I know there are options to withdraw from retirement accounts before 60 but it feels simpler to just save in the taxable to finance the pre-60 years.
Early retired four years ago at 53. Living off taxable. So I am in one of the positions you refer to. For most of my working career, Roth 401K's either did not exist or my employer did not offer them. So I had no other option (after maximizing tax deferred space and doing back door Roth contributions). However, had I had the Roth 401K option I would have put the maximum amount in each year (on top of maximizing tax deferred) and saved the excess in taxable. Seems I would be in an even better place than I am now. If, however, your excess cash is largely within the Roth 401k annual limit, I think I would split the excess between the two. The proportion to each would be up to you.

What I will add is that saving for decades in taxable and investing those funds does over time lock you into the investments you originally choose (due to imbedded capital gains). So chose wisely when it comes to the investments you are using in taxable.

You are in a great place and will benefit greatly from the options you have when you are in your 50's.
Real Knowledge Comes Only From Experience

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