Author Topic: Help me choose! after tax 401k vs taxable  (Read 1540 times)

firelight

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Help me choose! after tax 401k vs taxable
« on: December 09, 2015, 06:33:09 PM »
Hi Mustachians,
       Husband and I earn 250k gross per year. We currently max out our 401ks, do Roth IRAs through back door Roth (10000) and put the rest in taxable accounts. We don't have mortgages (don't plan on having one in the near future - read 4-7 years) and no other big loans in the foreseeable future. We are looking to FIRE in five to ten years max (depending on kid's educational plans). For the next year, my workplace is offering to do after tax 401k upto max of $53000.
Here are the choices as I see them:
1) contribute pretax 401k, Roth IRA and max out after tax 401k with the purpose of moving it to Roth IRA later.
2) contribute pretax 401k, Roth IRA and put the rest in taxable (Vanguard VTSAX mostly)
3) contribute pretax 401k, Roth IRA and do a split (fill after tax 401k with some amount, not the max)

What would you advise us to do?

Also if we choose 1, how would aftertax 401k to Roth IRA and backdoor Roth (traditional to Roth IRA) work together? Are there any tax implications?
Right now, for our Roth IRA, we put after tax money into traditional IRA and move it immediately to Roth IRA so we don't have any earnings
We don't have any money in traditional IRA.
All our retirement accounts are either 401ks or Roth IRAs.

TIA :)

MDM

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Re: Help me choose! after tax 401k vs taxable
« Reply #1 on: December 09, 2015, 11:46:53 PM »
The after tax 401k to Roth IRA is more commonly known as the mega backdoor Roth, so I'm guessing you may have already seen both https://www.bogleheads.org/forum/viewtopic.php?t=137366 and https://www.bogleheads.org/wiki/After-tax_401%28k%29.  If not, they are worth perusing.

Because they use different paths (401k vs. tIRA) to get into Roth IRAs they should not conflict.  You may want to keep separate Roth accounts merely for tracking purposes.

The big you-should-check-this-first is "does your 401k allow after tax contributions and in-service distributions?"

Vilgan

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Re: Help me choose! after tax 401k vs taxable
« Reply #2 on: December 12, 2015, 07:52:14 PM »
#1 is better if you have some way to convert your money from after-tax to Roth, either with an in-service withdrawal (typically allowed for after tax) or an in plan Roth conversion. Its also better if you don't plan on working there more than a few years.
#2 or #3 might be worth considering otherwise.

Having aftertax without the abiilty to convert it would be super silly tho, so I assume #1 is better. Tax free forever > paying taxes.

The Mobile Mustachian

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Re: Help me choose! after tax 401k vs taxable
« Reply #3 on: December 12, 2015, 10:27:43 PM »
For option 1, how long would you wait before transferring the after tax portion to your Roth IRA? Are there any penalties incurred by your plan for doing this? As an example, in service Roth transfers incur a 6 month period without employer contributions under my plan (pretty stupid, I know).

MDM

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Re: Help me choose! after tax 401k vs taxable
« Reply #4 on: December 12, 2015, 10:32:34 PM »
As an example, in service Roth transfers incur a 6 month period without employer contributions under my plan....

Does your plan allow after-tax (that are not Roth) contributions? 

That is the conduit to the mega-backdoor Roth as described here (and links therein): https://www.bogleheads.org/forum/viewtopic.php?t=137366