taxable account vs roth 401k

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Topic Author
bb
Posts: 325
Joined: Wed Apr 25, 2007 10:04 pm

taxable account vs roth 401k

Post by bb »

After maxing traditional 401k IRS limits would it be better to contribute to
a 401k after tax that could be converted to roth 401k (in plan conversion) or
keep the money in a taxable account? My employer's plan allows for in-plan
roth 401k conversions. Withdrawal of after tax contributions results in
suspension from the plan for 6 months
(contributions and employer match).
Which would be preferable from an early retirement prospective?
Last edited by bb on Sun Nov 15, 2015 11:10 pm, edited 2 times in total.
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JustinTime
Posts: 490
Joined: Wed Jul 01, 2015 6:52 pm

Re: taxable account vs roth 401k

Post by JustinTime »

Roth, does your plan allow a out of plan distribution of After tax to Roth IRA
bb wrote:After maxing traditional 401k IRS limits would it be better to contribute to
a 401k after tax that could be converted to roth 401k (in plan conversion) or
keep the money in a taxable account? My employer's plan allows for in-plan
roth 401k conversions. Withdrawal of after tax contributions results in
suspension from the plan for 6 months (contributions and employer match).
Which would be preferable from an early retirement prospective?
DSInvestor
Posts: 11429
Joined: Sat Oct 04, 2008 11:42 am

Re: taxable account vs roth 401k

Post by DSInvestor »

I like taxable accounts for early retirement. How much are you able to contribute to taxable if you max out after-tax non-Roth 401k contributions? If you cannot afford to do both, you'd have to think carefully about the after-tax non-Roth 401k contributions. If you can afford to contribute 100+K/yr to taxable after maxing out after-tax non-Roth 401k, it's a much easier decision as you've max out tax advantaged space and still will have substantial assets in taxable providing liquidity without the need to withdraw from retirement accounts in early retirement.

If you're going to contribute after-tax non-Roth 401k, I suppose it would be preferable to do in-plan conversion to avoid the suspension of contributions and match. Check to see if the after-tax non-Roth contributions can be converted in isolation without requiring you to convert your pretax assets. There should be no tax to convert the after-tax assets to Roth401k.
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Lafder
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Re: taxable account vs roth 401k

Post by Lafder »

Would your plan track the after tax basis and gains? If so, when you are no longer employed there, couldn't you transfer/roll the post tax to a Roth and the gains to a Rollover IRA ? So you do not miss out on the match while you work there, and you have some funds for a later Roth conversion?

I have been reading about this extensively, though it took me 2 years to figure it out enough to make it happen. I just did an out of plan Roth conversion, as well as Rollover IRA of the gains. My husband's employer does allow in plan to out of plan conversions without penalty.

It seems to me post tax 401k beats an after tax investment since there is potential to convert to a Roth.

Note there is such a thing Roth 401k which is not the same as Post tax 401k or a new Roth IRA

lafder
Topic Author
bb
Posts: 325
Joined: Wed Apr 25, 2007 10:04 pm

Re: taxable account vs roth 401k

Post by bb »

I thought about this a little more and I guess it comes down to is having the extra deferral space offered by roth 401k (converting after tax traditional 401k to roth 401k) worth giving up flexibility in terms of early retirement of a taxable account. I realize the money can be rolled into a roth ira after leaving employer and the contributions can be withdrawn without penalty. Aware of the rule 72t for getting the earnings
without penalty if necessary.
livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: taxable account vs roth 401k

Post by livesoft »

I think it would depend on one's current tax rate and their tax rate in [possibly early] retirement. A Roth 401(k) increases one's AGI which affects tax-credits and other things, so it could push one into a higher tax bracket. One can invest exceedingly tax-efficiently in a taxable account and do tax-loss harvesting which is often ignored in the calculations. That TLH can reduce the taxes on investments to less than zero in some circumstancs.
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Topic Author
bb
Posts: 325
Joined: Wed Apr 25, 2007 10:04 pm

Re: taxable account vs roth 401k

Post by bb »

I was under the impression that distributions from a roth 401k would not affect AGI? Does it really affect AGI and is the answer different between a Roth 401k and a Roth IRA? I assume money in a Roth 401k could be moved to a Roth IRA if there was any benefit to that.
DSInvestor
Posts: 11429
Joined: Sat Oct 04, 2008 11:42 am

Re: taxable account vs roth 401k

Post by DSInvestor »

bb wrote:I was under the impression that distributions from a roth 401k would not affect AGI? Does it really affect AGI and is the answer different between a Roth 401k and a Roth IRA? I assume money in a Roth 401k could be moved to a Roth IRA if there was any benefit to that.
AGI is increased when one contributes to Roth 401k rather than Traditional 401k. The taxable amount of conversion to Roth 401k also increases AGI. Find out what the rules are for in-plan conversions. For example, if your 401k is 50K pre-tax and 50K after-tax basis and you want to convert 50K to Roth 401k, will the plan allow you to:
a) cherry pick the 50K after-tax assets for conversion make it a non-taxable conversion or
b) prorate your basis. 50K is 50% of your account and the conversion consumes 50% of basis, resulting in taxable amount=25K non-taxable amount = 25K.

The increased AGI may force you into a higher bracket and affect tax credits, Roth IRA eligibility, Net Investment Income Tax etc.
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