After maxing 401K, save the rest in taxable or after-tax Roth?

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Topic Author
luckybamboo
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Joined: Tue Nov 01, 2016 7:56 pm

After maxing 401K, save the rest in taxable or after-tax Roth?

Post by luckybamboo »

We are a single income family. DH - 50 and I am 49. We plan to save $50,000 this year from his salary. With DH turning 50, 401K limit is 30,000.
His new employer offers after-tax Roth. Until last year, we split the contributions among 401K, backdoor Roth and taxable.
Now with the new option after-tax Roth available, should we put the remaining $20,000 in after-tax Roth OR split it between taxable and after-tax Roth?
My only concern is the availability of after-tax Roth for withdrawal before retirement. I am unable to find conclusive answer on how the earnings on after-tax roth are taxed.

Extra info
Our emergency fund is fully funded and 529 plans are fully funded for our kids college. Current retirement savings balance is $1.9m. Mortgage is $200,000 at 5.6%
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FiveK
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Re: After maxing 401K, save the rest in taxable or after-tax Roth?

Post by FiveK »

When withdrawn, earnings in the after-tax non-Roth account will be taxed the same as money withdrawn from the traditional 401k account.

See the Mega-backdoor Roth wiki for details. In particular, having the ability to move money from the after-tax non-Roth account "soon after contribution" (so there is little time to generate those taxable earnings) to a Roth account - either the Roth 401k account or a Roth IRA - gives that an advantage over using a taxable account.

Does that 401k plan allow quick movement of the money as described above?

See also the Prioritizing investments wiki.
Topic Author
luckybamboo
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Re: After maxing 401K, save the rest in taxable or after-tax Roth?

Post by luckybamboo »

I am still confused about the taxation of after-tax mega backdoor Roth contribution with in-plan conversion
1. Can the contribution be withdrawn anytime or is it subject to 5 year rule?
2. Do the earnings grow tax-free or are they subject to taxes in the future?
3. Can the earnings be withdrawn before 59.5 age?
lakpr
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Re: After maxing 401K, save the rest in taxable or after-tax Roth?

Post by lakpr »

luckybamboo wrote: Fri Jun 02, 2023 12:14 am I am still confused about the taxation of after-tax mega backdoor Roth contribution with in-plan conversion
1. Can the contribution be withdrawn anytime or is it subject to 5 year rule?
2. Do the earnings grow tax-free or are they subject to taxes in the future?
3. Can the earnings be withdrawn before 59.5 age?
Answer 1: that depends on the plan rules, and the manner in which the MBDR is implemented in your plan. If your after-tax contribution and earnings are withdrawn to a Roth IRA (and not to a Roth 401k subaccount within the plan), then of course the Roth IRA rules govern, and the contribution can be withdrawn any time. No 5-year rule.

Within the plan, once the Roth conversion happens, the amount of contributions may or may not be distributable. It may require separation from the employer, or age 55, or both.

Answer 2: Earnings remain taxable until the age 59.5. They will become tax-free only after that date.

Answer 3: Yes, but with income taxes and penalties due.
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ruralavalon
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Re: After maxing 401K, save the rest in taxable or after-tax Roth?

Post by ruralavalon »

luckybamboo wrote: Thu Jun 01, 2023 11:07 pm We are a single income family. DH - 50 and I am 49. We plan to save $50,000 this year from his salary. With DH turning 50, 401K limit is 30,000.
His new employer offers after-tax Roth. Until last year, we split the contributions among 401K, backdoor Roth and taxable.
Now with the new option after-tax Roth available, should we put the remaining $20,000 in after-tax Roth OR split it between taxable and after-tax Roth?
My only concern is the availability of after-tax Roth for withdrawal before retirement. I am unable to find conclusive answer on how the earnings on after-tax roth are taxed.

Extra info
Our emergency fund is fully funded and 529 plans are fully funded for our kids college. Current retirement savings balance is $1.9m. Mortgage is $200,000 at 5.6%
More information will be helpful.

Will he be eligible for both a substantial pension and Social Security benefits? About how much does he currently have in traditional tax-deferred accounts? What is your current tax bracket, both federal and state?

Most people, without a pension or very large balances in traditional tax-deferred accounts, will likely be in a lower tax bracket during retirement. So for most people traditional tax-deferred contributions will likely be better.


Wiki article, Traditional vs. Roth.
Wiki article, Traditional versus Roth examples.
TFB, The Case Against Roth 401(k): Still True After All These Years.

Does his employer's plan permit non-Roth, after-tax contributions? Does his employer's plan permit EITHER (1) in-plan conversion to the Roth 401k part of the plan of the non-Roth, after-tax 401k contributions, OR (2) in-service distribution to a Roth IRA of the non-Roth, after-tax 401k contributions?

TFB, The Elusive Mega Backdoor Roth.

Does his employer's plan have those features? If so maximum possible contributions to the plan will be better than contributions to a taxable brokerage account.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Topic Author
luckybamboo
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Joined: Tue Nov 01, 2016 7:56 pm

Re: After maxing 401K, save the rest in taxable or after-tax Roth?

Post by luckybamboo »

ruralavalon wrote: Fri Jun 02, 2023 10:34 am
luckybamboo wrote: Thu Jun 01, 2023 11:07 pm We are a single income family. DH - 50 and I am 49. We plan to save $50,000 this year from his salary. With DH turning 50, 401K limit is 30,000.
His new employer offers after-tax Roth. Until last year, we split the contributions among 401K, backdoor Roth and taxable.
Now with the new option after-tax Roth available, should we put the remaining $20,000 in after-tax Roth OR split it between taxable and after-tax Roth?
My only concern is the availability of after-tax Roth for withdrawal before retirement. I am unable to find conclusive answer on how the earnings on after-tax roth are taxed.

Extra info
Our emergency fund is fully funded and 529 plans are fully funded for our kids college. Current retirement savings balance is $1.9m. Mortgage is $200,000 at 5.6%
More information will be helpful.

Will he be eligible for both a substantial pension and Social Security benefits? About how much does he currently have in traditional tax-deferred accounts? What is your current tax bracket, both federal and state?

Pension - No
Social Security - Yes
Traditional 401(K) balance is $1.1m
Current tax bracket - 32%




Does his employer's plan permit non-Roth, after-tax contributions? Does his employer's plan permit EITHER (1) in-plan conversion to the Roth 401k part of the plan of the non-Roth, after-tax 401k contributions, OR (2) in-service distribution to a Roth IRA of the non-Roth, after-tax 401k contributions?

His employer does #1

TFB, The Elusive Mega Backdoor Roth.

Does his employer's plan have those features? If so maximum possible contributions to the plan will be better than contributions to a taxable brokerage account.
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ruralavalon
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Location: Illinois

Re: After maxing 401K, save the rest in taxable or after-tax Roth?

Post by ruralavalon »

luckybamboo wrote: Fri Jun 02, 2023 10:57 am
ruralavalon wrote: Fri Jun 02, 2023 10:34 am
luckybamboo wrote: Thu Jun 01, 2023 11:07 pm We are a single income family. DH - 50 and I am 49. We plan to save $50,000 this year from his salary. With DH turning 50, 401K limit is 30,000.
His new employer offers after-tax Roth. Until last year, we split the contributions among 401K, backdoor Roth and taxable.
Now with the new option after-tax Roth available, should we put the remaining $20,000 in after-tax Roth OR split it between taxable and after-tax Roth?
My only concern is the availability of after-tax Roth for withdrawal before retirement. I am unable to find conclusive answer on how the earnings on after-tax roth are taxed.

Extra info
Our emergency fund is fully funded and 529 plans are fully funded for our kids college. Current retirement savings balance is $1.9m. Mortgage is $200,000 at 5.6%
More information will be helpful.

Will he be eligible for both a substantial pension and Social Security benefits? About how much does he currently have in traditional tax-deferred accounts? What is your current tax bracket, both federal and state?

Pension - No
Social Security - Yes
Traditional 401(K) balance is $1.1m
Current tax bracket - 32%




Does his employer's plan permit non-Roth, after-tax contributions? Does his employer's plan permit EITHER (1) in-plan conversion to the Roth 401k part of the plan of the non-Roth, after-tax 401k contributions, OR (2) in-service distribution to a Roth IRA of the non-Roth, after-tax 401k contributions?

His employer does #1

TFB, The Elusive Mega Backdoor Roth.

Does his employer's plan have those features? If so maximum possible contributions to the plan will be better than contributions to a taxable brokerage account.
I suggest contributing the entire $50k annually to his 401k.That should be $30k in traditional employee deferral, and $20k in non-Roth after-tax contributions then converted to Roth in-plan.
luckybamboo wrote: Fri Jun 02, 2023 12:14 am I am still confused about the taxation of after-tax mega backdoor Roth contribution with in-plan conversion
1. Can the contribution be withdrawn anytime or is it subject to 5 year rule?
2. Do the earnings grow tax-free or are they subject to taxes in the future?
3. Can the earnings be withdrawn before 59.5 age?
He is contributing after-tax money, already taxed as ordinary income at 32%. With immediate in-plan conversion there is no tax on capital gains.

1. Contributions are not subject to a 5 year rule. I am unsure about a 5 year rule for earnings.

3. Contributions and earnings can be withdrawn penalty-free if "Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55, . . . ."

IRS, 401(k) Resource Guide - Plan Participants - General Distribution Rules.
Last edited by ruralavalon on Sat Jun 03, 2023 10:43 am, edited 5 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
backpacker61
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Joined: Wed May 20, 2020 6:36 am

Re: After maxing 401K, save the rest in taxable or after-tax Roth?

Post by backpacker61 »

If DH participates in a High Deductible Health Insurance Plan, I would contribute the maximum to a Health Savings Account prior to funding the after tax account with in-plan Roth conversion.

The advantage with the HSA is that the contribution to it immediately reduces your taxable income, and when withdrawn for qualifying medical expenses, the withdrawals are tax-free.

Unspent HSA balances can be invested, just like 401(K) balances.
“Now shall I walk or shall I ride? | 'Ride,' Pleasure said; | 'Walk,' Joy replied.” | | ― W.H. Davies
Topic Author
luckybamboo
Posts: 303
Joined: Tue Nov 01, 2016 7:56 pm

Re: After maxing 401K, save the rest in taxable or after-tax Roth?

Post by luckybamboo »

backpacker61 wrote: Sat Jun 03, 2023 10:06 am If DH participates in a High Deductible Health Insurance Plan, I would contribute the maximum to a Health Savings Account prior to funding the after tax account with in-plan Roth conversion.

The advantage with the HSA is that the contribution to it immediately reduces your taxable income, and when withdrawn for qualifying medical expenses, the withdrawals are tax-free.

Unspent HSA balances can be invested, just like 401(K) balances.
Yes. He is maxing out HSA as well and company contributes a little bit to HSA too.
HomeStretch
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Re: After maxing 401K, save the rest in taxable or after-tax Roth?

Post by HomeStretch »

+1 to fully utilizing the 401k mega backdoor Roth (MBR).

Fully utilize all Roth space available to you every year until retirement even if you need to withdraw from the Taxable account to cover living expenses because your net pay check is too low. If you contribute $30k to a Roth account via a MBR rather than a Taxable account, assuming 2% in dividends you reduce your annual taxable income by $600/year for the rest of your investment period. If you did this for 10 years, your annual taxable income reduction is $6k+. In retirement, the lower taxable income may benefit you in other ways than just income tax savings. For example, lower taxable income can give you more Roth conversion space, higher ACA insurance premium tax credits, help you avoid Medicare IRMAA, etc.

There are several ways to access 401k and IRA funds if needed prior to age 59-1/2 so don’t let potential accessibility to the funds be an issue in your Taxable v. Roth contribution decision.
Topic Author
luckybamboo
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Joined: Tue Nov 01, 2016 7:56 pm

Re: After maxing 401K, save the rest in taxable or after-tax Roth?

Post by luckybamboo »

HomeStretch wrote: Sat Jun 03, 2023 11:14 am +1 to fully utilizing the 401k mega backdoor Roth (MBR).

Fully utilize all Roth space available to you every year until retirement even if you need to withdraw from the Taxable account to cover living expenses because your net pay check is too low. If you contribute $30k to a Roth account via a MBR rather than a Taxable account, assuming 2% in dividends you reduce your annual taxable income by $600/year for the rest of your investment period. If you did this for 10 years, your annual taxable income reduction is $6k+. In retirement, the lower taxable income may benefit you in other ways than just income tax savings. For example, lower taxable income can give you more Roth conversion space, higher ACA insurance premium tax credits, help you avoid Medicare IRMAA, etc.

There are several ways to access 401k and IRA funds if needed prior to age 59-1/2 so don’t let potential accessibility to the funds be an issue in your Taxable v. Roth contribution decision.
Thanks a lot. Appreciate your insights
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