Author Topic: Taxable brokerage account vs. mega backdoor Roth  (Read 1202 times)

pnw_guy

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Taxable brokerage account vs. mega backdoor Roth
« on: August 31, 2020, 07:36:36 AM »
Like most Mustachians, I'm planning on retiring early an am thinking about how I'm going to fund my retirement until I can access my tax advantaged accounts. One idea that I've read about for early retirees is thinking about retirement in two buckets: Money in taxable brokerage accounts that can be accessed anytime, and tax advantaged accounts for when one is at a traditional retirement age (see here: https://ournextlife.com/2016/02/17/how-we-calculated-our-numbers-for-each-phase-of-early-retirement/).

So here's my question: I already max out my 401K, HSA, and IRA, but now I'm looking to do more so I have a bucket of money I can access in early retirement. I have access to a mega backdoor Roth through my employer where I can add up to an extra $37,000 into a Roth account (see here for an explanation: https://www.madfientist.com/after-tax-contributions/). Since one can withdraw contributions to a Roth account at anytime, is there any reason at all for me to use a taxable brokerage account for saving for early retirement?

I just want to double check my thinking that there's virtually no advantage to going with a taxable brokerage account before I start dumping money into a mega backdoor Roth.

Cheers!

terran

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Re: Taxable brokerage account vs. mega backdoor Roth
« Reply #1 on: August 31, 2020, 07:49:13 AM »
Personally I would (I do) contribute to a mega backdoor Roth before taxable,  but I'm not one of those who plan to split my retirement as I see no reason to do that. There are plenty of ways to access all retirement accounts at any age with proper planning, and doing so should result in the lowest total taxes as it will give many extra years at low tax brackets to get money out of tax deferred accounts.

ixtap

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Re: Taxable brokerage account vs. mega backdoor Roth
« Reply #2 on: August 31, 2020, 07:51:54 AM »
There are some caveats to withdrawing your contributions at any time for a MBR. There is an ordering system for conversions that means if you pay tax on any part of the conversion between after tax and Roth, that taxed part for year one has to come out, with penalty if less than five tax years old, before you can access year two. This will also apply if you are doing backdoor Roth or a conversion ladder.

You state that you can add $37k, do you not have any employer match? If you do have a match, be sure that you make your contributions in a way that does not interfere. The rules can vary widely.

Nonetheless, as long as you are aware of the timings, MBR is an excellent early retirement tool. If you are able to start it early enough, that may be how you fund a conversion ladder. It gives you a high level of control over your taxable income, which can affect ACA subsidies, as well as actual taxes.

Remember, money is fungible amd tax advantaged accounts are just that. There are numerous means of accessing them. If you keep your income low enough, even the 10% penalty can be an advantage over paying taxes during your highest earning years.

pnw_guy

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Re: Taxable brokerage account vs. mega backdoor Roth
« Reply #3 on: August 31, 2020, 01:20:52 PM »
There are some caveats to withdrawing your contributions at any time for a MBR. There is an ordering system for conversions that means if you pay tax on any part of the conversion between after tax and Roth, that taxed part for year one has to come out, with penalty if less than five tax years old, before you can access year two. This will also apply if you are doing backdoor Roth or a conversion ladder.

You state that you can add $37k, do you not have any employer match? If you do have a match, be sure that you make your contributions in a way that does not interfere. The rules can vary widely.

Nonetheless, as long as you are aware of the timings, MBR is an excellent early retirement tool. If you are able to start it early enough, that may be how you fund a conversion ladder. It gives you a high level of control over your taxable income, which can affect ACA subsidies, as well as actual taxes.

Remember, money is fungible amd tax advantaged accounts are just that. There are numerous means of accessing them. If you keep your income low enough, even the 10% penalty can be an advantage over paying taxes during your highest earning years.

This is very helpful information to know about restrictions pulling money out of MBR. Not so much for my early retirement dollars, but more so because I was also considering my sizable emergency 'stache in my MBR too (given so much discussion by MMM on why there's no need for an emergency fund).