(401a) after tax vs. Vanguard brokerage account index fund.

[latebloomingonion]

Hi guys,

Currently I max out all my pretax accounts— which are my 457 and 403b.  I max contribute to a Roth IRA as well .  For the money beyond that is it wiser to contribute to my workplace after tax 401(a) or just a standard vanguard total stock market index fund through vanguard?  I had been doing the later after reading Jim Collins work but recently was reminded about the workplace 401(a) fund. 

The fees for the domestic index fund through my workplace fund is 0.005% and the vanguard total stock market index fund fee is .04%. 

I should also mention I was planning on doing a slightly early retirement and just live off the vanguard brokerage account and a side hustle until I reach 59.5 when I would then access funds in the 403b/457.  More for simplicity sake than anything .

Very interested to read your thoughts and which one you would recommend .  Thank you for helping provide much needed insight! 

[terran]

You can access the 457(b) at any age once you're no longer working for that employer. Also see the sticky at the top of this section of the forum titled "How to withdraw funds from your IRA and 401k without penalty before age 59.5". Point being, don't let access convince you to make a suboptimal decision.

The big question with the after tax 401(a) is whether the plan will allow in-service withdrawals from the account, or conversions from after tax to Roth within the account? If so, then you have access to what is colloquially called a mega-backdoor Roth, and I would (do) max that thing out!

If you can't get that money moved over to Roth in one way or another while still working, then I would only contribute to it to the extent that 1) you want to invest the money in bonds and 2) your current marginal tax rate is higher than your expected marginal tax rate at withdrawal. This is because bond interest is always taxed at the same rate as other income, so deferring it to a time when you have a lower tax rate is a good thing. But capital gains (much of the income from a stock fund) is taxed at lower rates than ordinary income, so you'd be better off paying capital gains rates in taxable than paying ordinary income tax rates when you withdraw from the 401(a).

[latebloomingonion]

Since this does allow rollover's this plan is in your opinion better than a traditional brokerage account?  Is that mostly because of the rollover to a roth ira benefit? 

And yes, I edited my post so please do the same but I am glad you found that info.  Appreciate the help. 

[terran]

Since this does allow rollover's this plan is in your opinion better than a traditional brokerage account?  Is that mostly because of the rollover to a roth ira benefit? 

And yes, I edited my post so please do the same but I am glad you found that info.  Appreciate the help.

Yes, no question I would make the contribution and then immediately roll over to Roth IRA since the plan allows this. Roth is better in pretty much all ways than taxable, and this plan just adds the silly extra step thanks to the complexities of the tax code, but is otherwise basically a Roth IRA with a giant limit.

[latebloomingonion]

Great, you have been most helpful.  Thank you sincerely. 

[dandarc]

401a, 403b, 457b and you can do a mega-backdoor Roth in the 401(a)?

That's a sign that the employer actually gives a darn about the employee retirement plans. Well done!

I've wondered why our state doesn't have a 401K for state-employees. There is a 401(a) and a 457(b). A 403(b) if you're employed by the universities or schools. But if you're a regular state employee, just the 401(a) which accepts only the mandatory contributions and the 457(b).

Seems like that could garner bi-partisan support - would be a good benefit for state employees if you're a Democrat, or a low-cost way to stick it to the federal government if you're a Republican.

[latebloomingonion]

Since this does allow rollover's this plan is in your opinion better than a traditional brokerage account?  Is that mostly because of the rollover to a roth ira benefit? 

And yes, I edited my post so please do the same but I am glad you found that info.  Appreciate the help.

Yes, no question I would make the contribution and then immediately roll over to Roth IRA since the plan allows this. Roth is better in pretty much all ways than taxable, and this plan just adds the silly extra step thanks to the complexities of the tax code, but is otherwise basically a Roth IRA with a giant limit.

One more question ... since I will be rolling over the money from the 401a to a roth ira.  what should I do about the investment options for the 401a?  Should I leave it in a "savings fund" since the money is moving right away or should I still have automatic investments into an index fund? 

[terran]

Since this does allow rollover's this plan is in your opinion better than a traditional brokerage account?  Is that mostly because of the rollover to a roth ira benefit? 

And yes, I edited my post so please do the same but I am glad you found that info.  Appreciate the help.

Yes, no question I would make the contribution and then immediately roll over to Roth IRA since the plan allows this. Roth is better in pretty much all ways than taxable, and this plan just adds the silly extra step thanks to the complexities of the tax code, but is otherwise basically a Roth IRA with a giant limit.

One more question ... since I will be rolling over the money from the 401a to a roth ira.  what should I do about the investment options for the 401a?  Should I leave it in a "savings fund" since the money is moving right away or should I still have automatic investments into an index fund?

Doesn't much matter. If you can get it transferred before there are any gains that will simplify your taxes somewhat, but shouldn't be a big deal either way. I'd probably go with the savings fund if given the option just so I'd know how much would be transferred.