Author Topic: After-tax 401(k)?  (Read 874 times)

Rylito

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After-tax 401(k)?
« on: April 01, 2020, 08:57:16 AM »
I will max out contributions to my pre-tax 401(k) by June.  My employer also offers an after-tax 401(k) option which I'm considering, that has a range of low-cost Fidelity funds to choose from.  I may RE in about 2 years (and will still be under 59 1/2), so if I'd like to access the after-tax 401(k) funds then, would there be much of a benefit to contributing the money to the after-tax account as opposed to investing the money into a similar fund in brokerage account with Fidelity?

dandarc

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Re: After-tax 401(k)?
« Reply #1 on: April 01, 2020, 10:02:26 AM »
After-Tax 401K is best used for the Mega-backdoor Roth Technique. So you'd make the after-tax contributions and convert them to Roth, ideally as soon as possible after the money goes in. Does the plan allow in-service rollovers?

If you're not doing that technique, results aren't very favorable compared to a regular taxable account, and you get a massive book keeping headache as well.

terran

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Re: After-tax 401(k)?
« Reply #2 on: April 01, 2020, 10:10:20 AM »
I agree that after tax contributions are generally best used for mega backdoor Roth as investing in taxable (with favorable long term capital gains taxation) is usually better than investing in after tax (in which gains are taxed at ordinary income tax rates when withdrawn), with a couple of caveats:

1) It was recently pointed out to me on Bogleheads that leaving money in after tax can be preferable to investing in taxable if you invest in bonds in that account as bond interest is taxed at ordinary income tax rates no matter what, and in after tax you can defer until you're in a lower tax bracket.
2) Since you'll be leaving employment in a few years anyway, at which point you can roll over principle to Roth and gains to traditional without paying tax at the time of rollover, you'll only be a little worse off than if you could make immediate rollovers through in-service withdrawals.

That said, making the rollover to Roth IRA or making an in plan conversion to Roth 401(k) while still working would definitely be the best option, so do that if you can.

Rylito

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Re: After-tax 401(k)?
« Reply #3 on: April 01, 2020, 09:41:39 PM »
Thanks for the advice.  I'll check to confirm whether the plan does allow roll-overs to my Roth.

 

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