Taxable Brokerage or $58k in 401k?

[lifeplus]

I'm trying to determine if it makes sense for my wife and I to try and fully fund our 401k's to the $58k per person limit. The $19,500 is tax deferred, plus employer contributions = free money. That's a no brainer for us. The question is, does it make sense to fund the remaining $33k (in our case) each in post tax dollars into our 401k then do a mega back door roth conversion on those excess funds into a Roth IRA. OR take that $33k and put it into our taxable brokerage account?

I'm aware that gains grow tax free in a Roth IRA, but also know we cannot draw on any growth funds from that IRA for 5 years.

[ender]

Depends.

What does the breakdown of your retirement funds look like? Even do you plan on retiring?

[reeshau]

This is a job, as always, for the Investment Order thread.

But, specific questions as you have some kind of detailed plan worked out:  does your 401k have a Roth option?  If ao, you don't need to worry about back-dooring it.  You mention trying to roll over after-tax contributions, but does the plan allow in-service rollovers?

[seattlecyclone]

I'm aware that gains grow tax free in a Roth IRA, but also know we cannot draw on any growth funds from that IRA for 5 years.

This is not quite accurate. Yes, if you roll your after-tax 401(k) contributions over to a Roth IRA the money will grow tax-free if you withdraw it at the right time. This "cannot draw on any growth [from the converted funds] within five years" rule isn't really a thing.

There are two five-year rules to be aware of with Roth IRAs.

Rule The First: To withdraw growth tax-free, it needs to be a qualified distribution. To make a qualified distribution you must have had a Roth IRA open for at least five years, and you need to be 59½ (or disabled or dead). Put at least $1 in a Roth IRA before the year you turn 54½ and you don't really need to worry about this rule.

Rule The Second: If you make a conversion of pre-tax funds, you must wait five years to withdraw the principal for free. The mega backdoor tactic relies on the conversion of post-tax funds, so this one isn't super relevant here either.

[ender]

I'm aware that gains grow tax free in a Roth IRA, but also know we cannot draw on any growth funds from that IRA for 5 years.

This is not quite accurate. Yes, if you roll your after-tax 401(k) contributions over to a Roth IRA the money will grow tax-free if you withdraw it at the right time. This "cannot draw on any growth [from the converted funds] within five years" rule isn't really a thing.

There are two five-year rules to be aware of with Roth IRAs.

Rule The First: To withdraw growth tax-free, it needs to be a qualified distribution. To make a qualified distribution you must have had a Roth IRA open for at least five years, and you need to be 59½ (or disabled or dead). Put at least $1 in a Roth IRA before the year you turn 54½ and you don't really need to worry about this rule.

Rule The Second: If you make a conversion of pre-tax funds, you must wait five years to withdraw the principal for free. The mega backdoor tactic relies on the conversion of post-tax funds, so this one isn't super relevant here either.

+1

Megabackdoor is really a good way to defer any capital gains on the growth into the future, while using the principal as income during your roth conversion pipeline years.

By withdrawing the contributions any growth is admittedly locked behind rule (1) but for (2) you can withdraw at any point. You just have to keep track of all the contributions.

We've had a spreadsheet for a while of our Roth IRA principal contributions so megabackdoor just goes into that.