Author Topic: Is making after-tax 401(k) contributions a good idea for me?  (Read 700 times)

ec2991

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Is making after-tax 401(k) contributions a good idea for me?
« on: August 31, 2018, 02:06:35 PM »
I'm new to responsible adult life, and trying to figure out what to do with some spare cash: A little information that might be relevant --

-- 26 y/o single, finished PhD last year, and started first 'real job'
-- income before any taxes: ~75k this year
-- Maxing 401k, IRA, and HSA contributions for the year, no debt

Main question: I have ~40k in cash sitting around, which I don't anticipate needing for a very long time. Terrible, I know.  What's the prudent thing to do with this money? I have a respectable emergency fund apart from this already.

I was thinking I would just put it into my taxable Vanguard account, but I'm wondering if there's a better strategy. If I understand correctly, I could make sizable after-tax contributions to my 401(k), and then move the money into a Roth later. Is that a better idea? Other factors I should be considering?

If it's relevant, the 401(k) is with Fidelity. I haven't figured out yet if I can do in-service distributions (maybe this depends on the plan?) but in any case I'll be leaving this employer within a year or two (it's limited-term academic appointment). Happy to provide more details if they'd be helpful.

not_a_trex

  • Stubble
  • **
  • Posts: 108
Re: Is making after-tax 401(k) contributions a good idea for me?
« Reply #1 on: August 31, 2018, 03:08:51 PM »
I think contributing to an after-tax 401k account sounds like a good idea going forward. I don't think you can add money to an after-tax 401k account from a taxable account though. My understanding was contributions had to be from a paycheck.

PDXTabs

  • Pencil Stache
  • ****
  • Posts: 980
  • Age: 36
  • Location: Vancouver, WA, USA
Re: Is making after-tax 401(k) contributions a good idea for me?
« Reply #2 on: August 31, 2018, 03:56:02 PM »
I'm not sure that there is a wrong answer for this. You have a lot more options if you just put in in your taxable account.

terran

  • Handlebar Stache
  • *****
  • Posts: 1881
Re: Is making after-tax 401(k) contributions a good idea for me?
« Reply #3 on: August 31, 2018, 04:01:28 PM »
Find out if you can do in service distributions (to an IRA) or in service rollover within the plan to a Roth 401(k). If you can do either of those definitely do it, if not only do it if you plan to leave this employer pretty soon (maybe as much as a year?). Your gains will just be taxed at your marginal rate which is worse than capital gains rates in taxable, so I wouldn't want to let too many gains pile up before converting to Roth.

ec2991

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Re: Is making after-tax 401(k) contributions a good idea for me?
« Reply #4 on: August 31, 2018, 08:18:12 PM »
Thanks for the replies. I appreciate the input!

I've just realized that not all 401(k) plans even allow after-tax contributions, and, after much poking about in prospectuses (prospectii?), I've learned mine doesn't. So a moot point for now. At least I'll know to consider this option at my next job.

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1696
Re: Is making after-tax 401(k) contributions a good idea for me?
« Reply #5 on: September 01, 2018, 11:04:42 AM »
You can get pretty tax efficient in your regular brokerage account.

Vanguard Total Stock Market pays 1.8% in dividends, which as qualified dividends are only taxed at the 15% rate.  So with $10,000 invested you might see $180 in dividends and then pay $27 in tax.  You could actually pay more than that with the expense ratios of some mutual funds.

And you can use tax-exempt bonds.  At higher incomes the tax-exempt yield will beat a taxable yield.  Since those bonds are already tax-exempt, they belong in a taxable account.