Post Tax 401k or Taxable Brokerage Account?










3














I max out my pre-tax 401k, HSA, and do a roth IRA or backdoor Roth IRA.



With my additional savings is there any reason i would want to do a post-tax 401k instead of keeping it in a regular taxable brokerage account? Right now I have always been doing a brokerage account because I never considered the after-tax 401k.



Pros of post-tax 401k (after Tax EE deferrals)

- capital gains deferred
- dividends tax-deferred



Pros of Brokerage account.

- I can withdraw the money to invest in buy & hold real estate or other asset classes

- It can be withdrawn without penalties (but with taxes) for expenses outside of what an emergency fund would cover.



definitions per fidelity



AFTER TAX EE DEFERRALS
The amount you can contribute to a retirement savings plan, using a portion of your salary that has already been included in your taxable income. Income taxes have already been calculated on the amount contributed. However, any earnings on these contributions can grow tax-deferred. Income taxes are not due on any earnings until they are withdrawn from the plan. Your company may match all or a portion of your after-tax contributions in order to provide them with the most flexibility regarding taxes. (It may be advantageous for some people to pay taxes on the contributions now, because they would be in a higher tax bracket during retirement).










share|improve this question























  • Note that for your "pros", dividends and capital gains are tax deferred, not tax free.
    – D Stanley
    Nov 12 '18 at 22:09










  • Thank you will update great point
    – Frank Visaggio
    Nov 12 '18 at 22:13










  • I think by post-tax 401k you mean a traditional IRA where contributions are not deductible. If that is the case, it would be helpful if you could update your question.
    – Jeff O'Neill
    Nov 13 '18 at 14:08










  • @JeffO'Neill a non-deferred 401(k) is a real thing and is often referred to as a post-tax or after tax 401(k). It's not an IRA (but the same answer would apply if it were).
    – stannius
    Nov 13 '18 at 19:14











  • i need to look at my fidelity and see what exactly this post tax money is going into. It just has a % deducted and then when you go over the 19k limit for pre tax 401k it puts it somewhere else. I need to confirm where its actually goes.
    – Frank Visaggio
    Nov 13 '18 at 19:15















3














I max out my pre-tax 401k, HSA, and do a roth IRA or backdoor Roth IRA.



With my additional savings is there any reason i would want to do a post-tax 401k instead of keeping it in a regular taxable brokerage account? Right now I have always been doing a brokerage account because I never considered the after-tax 401k.



Pros of post-tax 401k (after Tax EE deferrals)

- capital gains deferred
- dividends tax-deferred



Pros of Brokerage account.

- I can withdraw the money to invest in buy & hold real estate or other asset classes

- It can be withdrawn without penalties (but with taxes) for expenses outside of what an emergency fund would cover.



definitions per fidelity



AFTER TAX EE DEFERRALS
The amount you can contribute to a retirement savings plan, using a portion of your salary that has already been included in your taxable income. Income taxes have already been calculated on the amount contributed. However, any earnings on these contributions can grow tax-deferred. Income taxes are not due on any earnings until they are withdrawn from the plan. Your company may match all or a portion of your after-tax contributions in order to provide them with the most flexibility regarding taxes. (It may be advantageous for some people to pay taxes on the contributions now, because they would be in a higher tax bracket during retirement).










share|improve this question























  • Note that for your "pros", dividends and capital gains are tax deferred, not tax free.
    – D Stanley
    Nov 12 '18 at 22:09










  • Thank you will update great point
    – Frank Visaggio
    Nov 12 '18 at 22:13










  • I think by post-tax 401k you mean a traditional IRA where contributions are not deductible. If that is the case, it would be helpful if you could update your question.
    – Jeff O'Neill
    Nov 13 '18 at 14:08










  • @JeffO'Neill a non-deferred 401(k) is a real thing and is often referred to as a post-tax or after tax 401(k). It's not an IRA (but the same answer would apply if it were).
    – stannius
    Nov 13 '18 at 19:14











  • i need to look at my fidelity and see what exactly this post tax money is going into. It just has a % deducted and then when you go over the 19k limit for pre tax 401k it puts it somewhere else. I need to confirm where its actually goes.
    – Frank Visaggio
    Nov 13 '18 at 19:15













3












3








3







I max out my pre-tax 401k, HSA, and do a roth IRA or backdoor Roth IRA.



With my additional savings is there any reason i would want to do a post-tax 401k instead of keeping it in a regular taxable brokerage account? Right now I have always been doing a brokerage account because I never considered the after-tax 401k.



Pros of post-tax 401k (after Tax EE deferrals)

- capital gains deferred
- dividends tax-deferred



Pros of Brokerage account.

- I can withdraw the money to invest in buy & hold real estate or other asset classes

- It can be withdrawn without penalties (but with taxes) for expenses outside of what an emergency fund would cover.



definitions per fidelity



AFTER TAX EE DEFERRALS
The amount you can contribute to a retirement savings plan, using a portion of your salary that has already been included in your taxable income. Income taxes have already been calculated on the amount contributed. However, any earnings on these contributions can grow tax-deferred. Income taxes are not due on any earnings until they are withdrawn from the plan. Your company may match all or a portion of your after-tax contributions in order to provide them with the most flexibility regarding taxes. (It may be advantageous for some people to pay taxes on the contributions now, because they would be in a higher tax bracket during retirement).










share|improve this question















I max out my pre-tax 401k, HSA, and do a roth IRA or backdoor Roth IRA.



With my additional savings is there any reason i would want to do a post-tax 401k instead of keeping it in a regular taxable brokerage account? Right now I have always been doing a brokerage account because I never considered the after-tax 401k.



Pros of post-tax 401k (after Tax EE deferrals)

- capital gains deferred
- dividends tax-deferred



Pros of Brokerage account.

- I can withdraw the money to invest in buy & hold real estate or other asset classes

- It can be withdrawn without penalties (but with taxes) for expenses outside of what an emergency fund would cover.



definitions per fidelity



AFTER TAX EE DEFERRALS
The amount you can contribute to a retirement savings plan, using a portion of your salary that has already been included in your taxable income. Income taxes have already been calculated on the amount contributed. However, any earnings on these contributions can grow tax-deferred. Income taxes are not due on any earnings until they are withdrawn from the plan. Your company may match all or a portion of your after-tax contributions in order to provide them with the most flexibility regarding taxes. (It may be advantageous for some people to pay taxes on the contributions now, because they would be in a higher tax bracket during retirement).







united-states taxes 401k asset-allocation roth-401k






share|improve this question















share|improve this question













share|improve this question




share|improve this question








edited Nov 15 '18 at 15:47







Frank Visaggio

















asked Nov 12 '18 at 21:39









Frank VisaggioFrank Visaggio

311313




311313











  • Note that for your "pros", dividends and capital gains are tax deferred, not tax free.
    – D Stanley
    Nov 12 '18 at 22:09










  • Thank you will update great point
    – Frank Visaggio
    Nov 12 '18 at 22:13










  • I think by post-tax 401k you mean a traditional IRA where contributions are not deductible. If that is the case, it would be helpful if you could update your question.
    – Jeff O'Neill
    Nov 13 '18 at 14:08










  • @JeffO'Neill a non-deferred 401(k) is a real thing and is often referred to as a post-tax or after tax 401(k). It's not an IRA (but the same answer would apply if it were).
    – stannius
    Nov 13 '18 at 19:14











  • i need to look at my fidelity and see what exactly this post tax money is going into. It just has a % deducted and then when you go over the 19k limit for pre tax 401k it puts it somewhere else. I need to confirm where its actually goes.
    – Frank Visaggio
    Nov 13 '18 at 19:15
















  • Note that for your "pros", dividends and capital gains are tax deferred, not tax free.
    – D Stanley
    Nov 12 '18 at 22:09










  • Thank you will update great point
    – Frank Visaggio
    Nov 12 '18 at 22:13










  • I think by post-tax 401k you mean a traditional IRA where contributions are not deductible. If that is the case, it would be helpful if you could update your question.
    – Jeff O'Neill
    Nov 13 '18 at 14:08










  • @JeffO'Neill a non-deferred 401(k) is a real thing and is often referred to as a post-tax or after tax 401(k). It's not an IRA (but the same answer would apply if it were).
    – stannius
    Nov 13 '18 at 19:14











  • i need to look at my fidelity and see what exactly this post tax money is going into. It just has a % deducted and then when you go over the 19k limit for pre tax 401k it puts it somewhere else. I need to confirm where its actually goes.
    – Frank Visaggio
    Nov 13 '18 at 19:15















Note that for your "pros", dividends and capital gains are tax deferred, not tax free.
– D Stanley
Nov 12 '18 at 22:09




Note that for your "pros", dividends and capital gains are tax deferred, not tax free.
– D Stanley
Nov 12 '18 at 22:09












Thank you will update great point
– Frank Visaggio
Nov 12 '18 at 22:13




Thank you will update great point
– Frank Visaggio
Nov 12 '18 at 22:13












I think by post-tax 401k you mean a traditional IRA where contributions are not deductible. If that is the case, it would be helpful if you could update your question.
– Jeff O'Neill
Nov 13 '18 at 14:08




I think by post-tax 401k you mean a traditional IRA where contributions are not deductible. If that is the case, it would be helpful if you could update your question.
– Jeff O'Neill
Nov 13 '18 at 14:08












@JeffO'Neill a non-deferred 401(k) is a real thing and is often referred to as a post-tax or after tax 401(k). It's not an IRA (but the same answer would apply if it were).
– stannius
Nov 13 '18 at 19:14





@JeffO'Neill a non-deferred 401(k) is a real thing and is often referred to as a post-tax or after tax 401(k). It's not an IRA (but the same answer would apply if it were).
– stannius
Nov 13 '18 at 19:14













i need to look at my fidelity and see what exactly this post tax money is going into. It just has a % deducted and then when you go over the 19k limit for pre tax 401k it puts it somewhere else. I need to confirm where its actually goes.
– Frank Visaggio
Nov 13 '18 at 19:15




i need to look at my fidelity and see what exactly this post tax money is going into. It just has a % deducted and then when you go over the 19k limit for pre tax 401k it puts it somewhere else. I need to confirm where its actually goes.
– Frank Visaggio
Nov 13 '18 at 19:15










2 Answers
2






active

oldest

votes


















5














A post-tax IRA is not a very good deal. You don't save any taxes now. When you take the money out, you pay ordinary income tax rates on the gains.



If you invest in a brokerage account instead, you pay capital gains taxes when you sell. I don't have a reference but I don't think the long-term capital gains rate has ever been higher than the ordinary income rate in the same bracket, and for as long as I can remember, it has often been a lot lower. Short term capital gains are at worst taxed at ordinary income rates. Dividends are taxed either at ordinary income tax rates or at capital gains rates.



One small advantage of a taxable 401(k) is that you don't have to pay taxes as you go. Dividends are taxable when you receive them, even if you reinvest them. You have some control over when you realize capital gains, but if you invest in a mutual fund, it may distribute capital gains against your will. If you do trade a lot in your taxable 401(k), the deferral could be a benefit. But you probably shouldn't be trading a lot in a retirement account.



A 401(k) has better protection from lawsuits. You can get that protection with insurance, including umbrella insurance.



Personally, I would never invest in a taxable 401(k). You give up too much flexibility for too little tax deferral.






share|improve this answer






















  • would this AFTER TAX EE DEFERRAL be considered the same post tax IRA? sorry about my OP not being accurate i updated it now.
    – Frank Visaggio
    Nov 15 '18 at 16:02










  • @FrankVisaggio sorry, I don't know.
    – stannius
    Nov 16 '18 at 19:11


















4















With my additional savings is there any reason i would want to do a post-tax 401k instead of keeping it in a regular taxable brokerage account?




Let's clarify what you mean by "post-tax 401k".



First there is the Roth 401k, which behaves like a Roth IRA -- money that you contribute is taxed, but you pay no taxes on earnings when you withdraw them in retirement. However, a Roth 401k shares the same contribution pool as a Traditional 401k, so if your goal is to invest more money, this is not helpful -- every dollar you contribute to a Roth 401k is one less dollar you can contribute to a Traditional 401k, and vice versa.



The second is rarer, and is not offered by many 401k providers; it is called spillover contributions, spillover elections, or excess elections. In this case (which, again, most 401k providers do not currently support), you can contribute money in excess of the normal contribution limit ($18,500 in 2018, $19,000 in 2019) to a Traditional 401k; however, it is not tax-deductible like normal contributions are.



On the face of it, this is a bad move: you would pay income taxes on any earnings, which will be more than the long term capital gains you would pay on any earnings if it was just a brokerage account.



However, being in a 401k, it can be rolled over into a Traditional IRA (though it would have the same problem), or into a Roth IRA. Since it has already been taxed, it generates no new taxes to convert it to a Roth IRA, and now any growth will be created tax free. Since the amount of spillover contributions you're allowed is quite large (in 2018, $36,500 minus whatever employer match you may have had), it functions very, very, very much like an additional, and quite possibly very large, Roth IRA contribution. This process -- making spillover contributions, and then rolling them over into a Roth IRA -- is called the megabackdoor Roth.



Rolling the money over into a Roth IRA does require either that your 401k provider allow in service withdrawals, or that you leave your employer, however. If your 401k provider does not allow in service withdrawals, and you plan on staying with your employer for a significant number of years to come, the megabackdoor Roth may not be an appropriate choice.



More information on the megabackdoor Roth can be found at Bogleheads or at the Mad Fientist.




I can withdraw the money to invest in buy & hold real estate or other asset classes
It can be withdrawn without penalties (but with taxes) for expenses outside of what an emergency fund would cover.




Be aware that, as with other Roth IRA conversions, five years after you convert the money to a Roth IRA (either from a Roth 401k or via the megabackdoor Roth) you can withdraw that amount (though not any earnings) at any time without penalty.






share|improve this answer




















  • Great answer. If an employer allows both after tax 401k contributions and in-service withdrawals, then it's a no-brainer.
    – TTT
    Nov 13 '18 at 17:45










  • fidelity defines this vehicle as TAX EE DEFERRALS see my edited post for the definition.
    – Frank Visaggio
    Nov 15 '18 at 15:53










  • @FrankVisaggio It is unclear from the definition given whether it is referring to a Roth 401k or spillover contributions. If you have not yet contributed $18,500 to your 401k this year, it will be a Roth 401k. If you have already contributed more than $18,500 (not including employer match, etc), it will be spillover contributions.
    – Magua
    Nov 16 '18 at 16:04










  • It’s spillover.
    – Frank Visaggio
    Nov 16 '18 at 16:42










  • "Be aware that, as with other Roth IRA conversions, five years after you convert the money to a Roth IRA (either from a Roth 401k or via the megabackdoor Roth) you can withdraw that amount (though not any earnings) at any time without penalty." When rolling over from Roth 401k to Roth IRA, the contributions and earnings from the Roth 401k are carried over into the Roth IRA, and the contributions can be withdrawn immediately without tax or penalty.
    – user102008
    Dec 31 '18 at 1:19










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2 Answers
2






active

oldest

votes








2 Answers
2






active

oldest

votes









active

oldest

votes






active

oldest

votes









5














A post-tax IRA is not a very good deal. You don't save any taxes now. When you take the money out, you pay ordinary income tax rates on the gains.



If you invest in a brokerage account instead, you pay capital gains taxes when you sell. I don't have a reference but I don't think the long-term capital gains rate has ever been higher than the ordinary income rate in the same bracket, and for as long as I can remember, it has often been a lot lower. Short term capital gains are at worst taxed at ordinary income rates. Dividends are taxed either at ordinary income tax rates or at capital gains rates.



One small advantage of a taxable 401(k) is that you don't have to pay taxes as you go. Dividends are taxable when you receive them, even if you reinvest them. You have some control over when you realize capital gains, but if you invest in a mutual fund, it may distribute capital gains against your will. If you do trade a lot in your taxable 401(k), the deferral could be a benefit. But you probably shouldn't be trading a lot in a retirement account.



A 401(k) has better protection from lawsuits. You can get that protection with insurance, including umbrella insurance.



Personally, I would never invest in a taxable 401(k). You give up too much flexibility for too little tax deferral.






share|improve this answer






















  • would this AFTER TAX EE DEFERRAL be considered the same post tax IRA? sorry about my OP not being accurate i updated it now.
    – Frank Visaggio
    Nov 15 '18 at 16:02










  • @FrankVisaggio sorry, I don't know.
    – stannius
    Nov 16 '18 at 19:11















5














A post-tax IRA is not a very good deal. You don't save any taxes now. When you take the money out, you pay ordinary income tax rates on the gains.



If you invest in a brokerage account instead, you pay capital gains taxes when you sell. I don't have a reference but I don't think the long-term capital gains rate has ever been higher than the ordinary income rate in the same bracket, and for as long as I can remember, it has often been a lot lower. Short term capital gains are at worst taxed at ordinary income rates. Dividends are taxed either at ordinary income tax rates or at capital gains rates.



One small advantage of a taxable 401(k) is that you don't have to pay taxes as you go. Dividends are taxable when you receive them, even if you reinvest them. You have some control over when you realize capital gains, but if you invest in a mutual fund, it may distribute capital gains against your will. If you do trade a lot in your taxable 401(k), the deferral could be a benefit. But you probably shouldn't be trading a lot in a retirement account.



A 401(k) has better protection from lawsuits. You can get that protection with insurance, including umbrella insurance.



Personally, I would never invest in a taxable 401(k). You give up too much flexibility for too little tax deferral.






share|improve this answer






















  • would this AFTER TAX EE DEFERRAL be considered the same post tax IRA? sorry about my OP not being accurate i updated it now.
    – Frank Visaggio
    Nov 15 '18 at 16:02










  • @FrankVisaggio sorry, I don't know.
    – stannius
    Nov 16 '18 at 19:11













5












5








5






A post-tax IRA is not a very good deal. You don't save any taxes now. When you take the money out, you pay ordinary income tax rates on the gains.



If you invest in a brokerage account instead, you pay capital gains taxes when you sell. I don't have a reference but I don't think the long-term capital gains rate has ever been higher than the ordinary income rate in the same bracket, and for as long as I can remember, it has often been a lot lower. Short term capital gains are at worst taxed at ordinary income rates. Dividends are taxed either at ordinary income tax rates or at capital gains rates.



One small advantage of a taxable 401(k) is that you don't have to pay taxes as you go. Dividends are taxable when you receive them, even if you reinvest them. You have some control over when you realize capital gains, but if you invest in a mutual fund, it may distribute capital gains against your will. If you do trade a lot in your taxable 401(k), the deferral could be a benefit. But you probably shouldn't be trading a lot in a retirement account.



A 401(k) has better protection from lawsuits. You can get that protection with insurance, including umbrella insurance.



Personally, I would never invest in a taxable 401(k). You give up too much flexibility for too little tax deferral.






share|improve this answer














A post-tax IRA is not a very good deal. You don't save any taxes now. When you take the money out, you pay ordinary income tax rates on the gains.



If you invest in a brokerage account instead, you pay capital gains taxes when you sell. I don't have a reference but I don't think the long-term capital gains rate has ever been higher than the ordinary income rate in the same bracket, and for as long as I can remember, it has often been a lot lower. Short term capital gains are at worst taxed at ordinary income rates. Dividends are taxed either at ordinary income tax rates or at capital gains rates.



One small advantage of a taxable 401(k) is that you don't have to pay taxes as you go. Dividends are taxable when you receive them, even if you reinvest them. You have some control over when you realize capital gains, but if you invest in a mutual fund, it may distribute capital gains against your will. If you do trade a lot in your taxable 401(k), the deferral could be a benefit. But you probably shouldn't be trading a lot in a retirement account.



A 401(k) has better protection from lawsuits. You can get that protection with insurance, including umbrella insurance.



Personally, I would never invest in a taxable 401(k). You give up too much flexibility for too little tax deferral.







share|improve this answer














share|improve this answer



share|improve this answer








edited Nov 13 '18 at 21:06

























answered Nov 12 '18 at 22:01









stanniusstannius

2,6611924




2,6611924











  • would this AFTER TAX EE DEFERRAL be considered the same post tax IRA? sorry about my OP not being accurate i updated it now.
    – Frank Visaggio
    Nov 15 '18 at 16:02










  • @FrankVisaggio sorry, I don't know.
    – stannius
    Nov 16 '18 at 19:11
















  • would this AFTER TAX EE DEFERRAL be considered the same post tax IRA? sorry about my OP not being accurate i updated it now.
    – Frank Visaggio
    Nov 15 '18 at 16:02










  • @FrankVisaggio sorry, I don't know.
    – stannius
    Nov 16 '18 at 19:11















would this AFTER TAX EE DEFERRAL be considered the same post tax IRA? sorry about my OP not being accurate i updated it now.
– Frank Visaggio
Nov 15 '18 at 16:02




would this AFTER TAX EE DEFERRAL be considered the same post tax IRA? sorry about my OP not being accurate i updated it now.
– Frank Visaggio
Nov 15 '18 at 16:02












@FrankVisaggio sorry, I don't know.
– stannius
Nov 16 '18 at 19:11




@FrankVisaggio sorry, I don't know.
– stannius
Nov 16 '18 at 19:11













4















With my additional savings is there any reason i would want to do a post-tax 401k instead of keeping it in a regular taxable brokerage account?




Let's clarify what you mean by "post-tax 401k".



First there is the Roth 401k, which behaves like a Roth IRA -- money that you contribute is taxed, but you pay no taxes on earnings when you withdraw them in retirement. However, a Roth 401k shares the same contribution pool as a Traditional 401k, so if your goal is to invest more money, this is not helpful -- every dollar you contribute to a Roth 401k is one less dollar you can contribute to a Traditional 401k, and vice versa.



The second is rarer, and is not offered by many 401k providers; it is called spillover contributions, spillover elections, or excess elections. In this case (which, again, most 401k providers do not currently support), you can contribute money in excess of the normal contribution limit ($18,500 in 2018, $19,000 in 2019) to a Traditional 401k; however, it is not tax-deductible like normal contributions are.



On the face of it, this is a bad move: you would pay income taxes on any earnings, which will be more than the long term capital gains you would pay on any earnings if it was just a brokerage account.



However, being in a 401k, it can be rolled over into a Traditional IRA (though it would have the same problem), or into a Roth IRA. Since it has already been taxed, it generates no new taxes to convert it to a Roth IRA, and now any growth will be created tax free. Since the amount of spillover contributions you're allowed is quite large (in 2018, $36,500 minus whatever employer match you may have had), it functions very, very, very much like an additional, and quite possibly very large, Roth IRA contribution. This process -- making spillover contributions, and then rolling them over into a Roth IRA -- is called the megabackdoor Roth.



Rolling the money over into a Roth IRA does require either that your 401k provider allow in service withdrawals, or that you leave your employer, however. If your 401k provider does not allow in service withdrawals, and you plan on staying with your employer for a significant number of years to come, the megabackdoor Roth may not be an appropriate choice.



More information on the megabackdoor Roth can be found at Bogleheads or at the Mad Fientist.




I can withdraw the money to invest in buy & hold real estate or other asset classes
It can be withdrawn without penalties (but with taxes) for expenses outside of what an emergency fund would cover.




Be aware that, as with other Roth IRA conversions, five years after you convert the money to a Roth IRA (either from a Roth 401k or via the megabackdoor Roth) you can withdraw that amount (though not any earnings) at any time without penalty.






share|improve this answer




















  • Great answer. If an employer allows both after tax 401k contributions and in-service withdrawals, then it's a no-brainer.
    – TTT
    Nov 13 '18 at 17:45










  • fidelity defines this vehicle as TAX EE DEFERRALS see my edited post for the definition.
    – Frank Visaggio
    Nov 15 '18 at 15:53










  • @FrankVisaggio It is unclear from the definition given whether it is referring to a Roth 401k or spillover contributions. If you have not yet contributed $18,500 to your 401k this year, it will be a Roth 401k. If you have already contributed more than $18,500 (not including employer match, etc), it will be spillover contributions.
    – Magua
    Nov 16 '18 at 16:04










  • It’s spillover.
    – Frank Visaggio
    Nov 16 '18 at 16:42










  • "Be aware that, as with other Roth IRA conversions, five years after you convert the money to a Roth IRA (either from a Roth 401k or via the megabackdoor Roth) you can withdraw that amount (though not any earnings) at any time without penalty." When rolling over from Roth 401k to Roth IRA, the contributions and earnings from the Roth 401k are carried over into the Roth IRA, and the contributions can be withdrawn immediately without tax or penalty.
    – user102008
    Dec 31 '18 at 1:19















4















With my additional savings is there any reason i would want to do a post-tax 401k instead of keeping it in a regular taxable brokerage account?




Let's clarify what you mean by "post-tax 401k".



First there is the Roth 401k, which behaves like a Roth IRA -- money that you contribute is taxed, but you pay no taxes on earnings when you withdraw them in retirement. However, a Roth 401k shares the same contribution pool as a Traditional 401k, so if your goal is to invest more money, this is not helpful -- every dollar you contribute to a Roth 401k is one less dollar you can contribute to a Traditional 401k, and vice versa.



The second is rarer, and is not offered by many 401k providers; it is called spillover contributions, spillover elections, or excess elections. In this case (which, again, most 401k providers do not currently support), you can contribute money in excess of the normal contribution limit ($18,500 in 2018, $19,000 in 2019) to a Traditional 401k; however, it is not tax-deductible like normal contributions are.



On the face of it, this is a bad move: you would pay income taxes on any earnings, which will be more than the long term capital gains you would pay on any earnings if it was just a brokerage account.



However, being in a 401k, it can be rolled over into a Traditional IRA (though it would have the same problem), or into a Roth IRA. Since it has already been taxed, it generates no new taxes to convert it to a Roth IRA, and now any growth will be created tax free. Since the amount of spillover contributions you're allowed is quite large (in 2018, $36,500 minus whatever employer match you may have had), it functions very, very, very much like an additional, and quite possibly very large, Roth IRA contribution. This process -- making spillover contributions, and then rolling them over into a Roth IRA -- is called the megabackdoor Roth.



Rolling the money over into a Roth IRA does require either that your 401k provider allow in service withdrawals, or that you leave your employer, however. If your 401k provider does not allow in service withdrawals, and you plan on staying with your employer for a significant number of years to come, the megabackdoor Roth may not be an appropriate choice.



More information on the megabackdoor Roth can be found at Bogleheads or at the Mad Fientist.




I can withdraw the money to invest in buy & hold real estate or other asset classes
It can be withdrawn without penalties (but with taxes) for expenses outside of what an emergency fund would cover.




Be aware that, as with other Roth IRA conversions, five years after you convert the money to a Roth IRA (either from a Roth 401k or via the megabackdoor Roth) you can withdraw that amount (though not any earnings) at any time without penalty.






share|improve this answer




















  • Great answer. If an employer allows both after tax 401k contributions and in-service withdrawals, then it's a no-brainer.
    – TTT
    Nov 13 '18 at 17:45










  • fidelity defines this vehicle as TAX EE DEFERRALS see my edited post for the definition.
    – Frank Visaggio
    Nov 15 '18 at 15:53










  • @FrankVisaggio It is unclear from the definition given whether it is referring to a Roth 401k or spillover contributions. If you have not yet contributed $18,500 to your 401k this year, it will be a Roth 401k. If you have already contributed more than $18,500 (not including employer match, etc), it will be spillover contributions.
    – Magua
    Nov 16 '18 at 16:04










  • It’s spillover.
    – Frank Visaggio
    Nov 16 '18 at 16:42










  • "Be aware that, as with other Roth IRA conversions, five years after you convert the money to a Roth IRA (either from a Roth 401k or via the megabackdoor Roth) you can withdraw that amount (though not any earnings) at any time without penalty." When rolling over from Roth 401k to Roth IRA, the contributions and earnings from the Roth 401k are carried over into the Roth IRA, and the contributions can be withdrawn immediately without tax or penalty.
    – user102008
    Dec 31 '18 at 1:19













4












4








4







With my additional savings is there any reason i would want to do a post-tax 401k instead of keeping it in a regular taxable brokerage account?




Let's clarify what you mean by "post-tax 401k".



First there is the Roth 401k, which behaves like a Roth IRA -- money that you contribute is taxed, but you pay no taxes on earnings when you withdraw them in retirement. However, a Roth 401k shares the same contribution pool as a Traditional 401k, so if your goal is to invest more money, this is not helpful -- every dollar you contribute to a Roth 401k is one less dollar you can contribute to a Traditional 401k, and vice versa.



The second is rarer, and is not offered by many 401k providers; it is called spillover contributions, spillover elections, or excess elections. In this case (which, again, most 401k providers do not currently support), you can contribute money in excess of the normal contribution limit ($18,500 in 2018, $19,000 in 2019) to a Traditional 401k; however, it is not tax-deductible like normal contributions are.



On the face of it, this is a bad move: you would pay income taxes on any earnings, which will be more than the long term capital gains you would pay on any earnings if it was just a brokerage account.



However, being in a 401k, it can be rolled over into a Traditional IRA (though it would have the same problem), or into a Roth IRA. Since it has already been taxed, it generates no new taxes to convert it to a Roth IRA, and now any growth will be created tax free. Since the amount of spillover contributions you're allowed is quite large (in 2018, $36,500 minus whatever employer match you may have had), it functions very, very, very much like an additional, and quite possibly very large, Roth IRA contribution. This process -- making spillover contributions, and then rolling them over into a Roth IRA -- is called the megabackdoor Roth.



Rolling the money over into a Roth IRA does require either that your 401k provider allow in service withdrawals, or that you leave your employer, however. If your 401k provider does not allow in service withdrawals, and you plan on staying with your employer for a significant number of years to come, the megabackdoor Roth may not be an appropriate choice.



More information on the megabackdoor Roth can be found at Bogleheads or at the Mad Fientist.




I can withdraw the money to invest in buy & hold real estate or other asset classes
It can be withdrawn without penalties (but with taxes) for expenses outside of what an emergency fund would cover.




Be aware that, as with other Roth IRA conversions, five years after you convert the money to a Roth IRA (either from a Roth 401k or via the megabackdoor Roth) you can withdraw that amount (though not any earnings) at any time without penalty.






share|improve this answer













With my additional savings is there any reason i would want to do a post-tax 401k instead of keeping it in a regular taxable brokerage account?




Let's clarify what you mean by "post-tax 401k".



First there is the Roth 401k, which behaves like a Roth IRA -- money that you contribute is taxed, but you pay no taxes on earnings when you withdraw them in retirement. However, a Roth 401k shares the same contribution pool as a Traditional 401k, so if your goal is to invest more money, this is not helpful -- every dollar you contribute to a Roth 401k is one less dollar you can contribute to a Traditional 401k, and vice versa.



The second is rarer, and is not offered by many 401k providers; it is called spillover contributions, spillover elections, or excess elections. In this case (which, again, most 401k providers do not currently support), you can contribute money in excess of the normal contribution limit ($18,500 in 2018, $19,000 in 2019) to a Traditional 401k; however, it is not tax-deductible like normal contributions are.



On the face of it, this is a bad move: you would pay income taxes on any earnings, which will be more than the long term capital gains you would pay on any earnings if it was just a brokerage account.



However, being in a 401k, it can be rolled over into a Traditional IRA (though it would have the same problem), or into a Roth IRA. Since it has already been taxed, it generates no new taxes to convert it to a Roth IRA, and now any growth will be created tax free. Since the amount of spillover contributions you're allowed is quite large (in 2018, $36,500 minus whatever employer match you may have had), it functions very, very, very much like an additional, and quite possibly very large, Roth IRA contribution. This process -- making spillover contributions, and then rolling them over into a Roth IRA -- is called the megabackdoor Roth.



Rolling the money over into a Roth IRA does require either that your 401k provider allow in service withdrawals, or that you leave your employer, however. If your 401k provider does not allow in service withdrawals, and you plan on staying with your employer for a significant number of years to come, the megabackdoor Roth may not be an appropriate choice.



More information on the megabackdoor Roth can be found at Bogleheads or at the Mad Fientist.




I can withdraw the money to invest in buy & hold real estate or other asset classes
It can be withdrawn without penalties (but with taxes) for expenses outside of what an emergency fund would cover.




Be aware that, as with other Roth IRA conversions, five years after you convert the money to a Roth IRA (either from a Roth 401k or via the megabackdoor Roth) you can withdraw that amount (though not any earnings) at any time without penalty.







share|improve this answer












share|improve this answer



share|improve this answer










answered Nov 13 '18 at 17:14









MaguaMagua

4,607722




4,607722











  • Great answer. If an employer allows both after tax 401k contributions and in-service withdrawals, then it's a no-brainer.
    – TTT
    Nov 13 '18 at 17:45










  • fidelity defines this vehicle as TAX EE DEFERRALS see my edited post for the definition.
    – Frank Visaggio
    Nov 15 '18 at 15:53










  • @FrankVisaggio It is unclear from the definition given whether it is referring to a Roth 401k or spillover contributions. If you have not yet contributed $18,500 to your 401k this year, it will be a Roth 401k. If you have already contributed more than $18,500 (not including employer match, etc), it will be spillover contributions.
    – Magua
    Nov 16 '18 at 16:04










  • It’s spillover.
    – Frank Visaggio
    Nov 16 '18 at 16:42










  • "Be aware that, as with other Roth IRA conversions, five years after you convert the money to a Roth IRA (either from a Roth 401k or via the megabackdoor Roth) you can withdraw that amount (though not any earnings) at any time without penalty." When rolling over from Roth 401k to Roth IRA, the contributions and earnings from the Roth 401k are carried over into the Roth IRA, and the contributions can be withdrawn immediately without tax or penalty.
    – user102008
    Dec 31 '18 at 1:19
















  • Great answer. If an employer allows both after tax 401k contributions and in-service withdrawals, then it's a no-brainer.
    – TTT
    Nov 13 '18 at 17:45










  • fidelity defines this vehicle as TAX EE DEFERRALS see my edited post for the definition.
    – Frank Visaggio
    Nov 15 '18 at 15:53










  • @FrankVisaggio It is unclear from the definition given whether it is referring to a Roth 401k or spillover contributions. If you have not yet contributed $18,500 to your 401k this year, it will be a Roth 401k. If you have already contributed more than $18,500 (not including employer match, etc), it will be spillover contributions.
    – Magua
    Nov 16 '18 at 16:04










  • It’s spillover.
    – Frank Visaggio
    Nov 16 '18 at 16:42










  • "Be aware that, as with other Roth IRA conversions, five years after you convert the money to a Roth IRA (either from a Roth 401k or via the megabackdoor Roth) you can withdraw that amount (though not any earnings) at any time without penalty." When rolling over from Roth 401k to Roth IRA, the contributions and earnings from the Roth 401k are carried over into the Roth IRA, and the contributions can be withdrawn immediately without tax or penalty.
    – user102008
    Dec 31 '18 at 1:19















Great answer. If an employer allows both after tax 401k contributions and in-service withdrawals, then it's a no-brainer.
– TTT
Nov 13 '18 at 17:45




Great answer. If an employer allows both after tax 401k contributions and in-service withdrawals, then it's a no-brainer.
– TTT
Nov 13 '18 at 17:45












fidelity defines this vehicle as TAX EE DEFERRALS see my edited post for the definition.
– Frank Visaggio
Nov 15 '18 at 15:53




fidelity defines this vehicle as TAX EE DEFERRALS see my edited post for the definition.
– Frank Visaggio
Nov 15 '18 at 15:53












@FrankVisaggio It is unclear from the definition given whether it is referring to a Roth 401k or spillover contributions. If you have not yet contributed $18,500 to your 401k this year, it will be a Roth 401k. If you have already contributed more than $18,500 (not including employer match, etc), it will be spillover contributions.
– Magua
Nov 16 '18 at 16:04




@FrankVisaggio It is unclear from the definition given whether it is referring to a Roth 401k or spillover contributions. If you have not yet contributed $18,500 to your 401k this year, it will be a Roth 401k. If you have already contributed more than $18,500 (not including employer match, etc), it will be spillover contributions.
– Magua
Nov 16 '18 at 16:04












It’s spillover.
– Frank Visaggio
Nov 16 '18 at 16:42




It’s spillover.
– Frank Visaggio
Nov 16 '18 at 16:42












"Be aware that, as with other Roth IRA conversions, five years after you convert the money to a Roth IRA (either from a Roth 401k or via the megabackdoor Roth) you can withdraw that amount (though not any earnings) at any time without penalty." When rolling over from Roth 401k to Roth IRA, the contributions and earnings from the Roth 401k are carried over into the Roth IRA, and the contributions can be withdrawn immediately without tax or penalty.
– user102008
Dec 31 '18 at 1:19




"Be aware that, as with other Roth IRA conversions, five years after you convert the money to a Roth IRA (either from a Roth 401k or via the megabackdoor Roth) you can withdraw that amount (though not any earnings) at any time without penalty." When rolling over from Roth 401k to Roth IRA, the contributions and earnings from the Roth 401k are carried over into the Roth IRA, and the contributions can be withdrawn immediately without tax or penalty.
– user102008
Dec 31 '18 at 1:19

















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