After-tax contribution (Fidelity) via my workplace, or invest it myself in a taxable brokerage account?

Investing
#1

My new workplace offers after-tax contributions as an option, which is a first for me. I’d like to automatically invest 30% of my post-tax income so I don’t see it in my bank account as potentially spendable money. Am I better off using my employer’s plan, or investing it myself in a private account? The employer does not match on after-tax contributions, and I’ve already maxed out my 401(k) for the year.

I’m leaning toward investing it myself and have a vague sense of why, but would love guidance to confirm that my hunch is true. My current “why” is because the benefits seem approximately the same, but I’d have more flexibility if I managed it myself given that there don’t seem to be any advantages to the employer option, and may only have disadvantages.

1 Like
#2

Ask if your employer allows withdrawal of the after-tax contributions while you’re still active with the company (I’m assuming after-tax is not Roth). If your employer allows it, do backdoor Roth IRA while active, that will be more beneficial. If they don’t allow it, then 2 options:

  1. Like you said, investing on your own because of more flexibility. OR
  2. Wait until you terminate employment and rollover the after-tax contributions into a Roth. This will give you more tax-free money than $6k/year. You can rollover the earnings to traditional IRA if you don’t want to be taxed at the time of rollover.
#3

You’ve become my personal investment consultant! Thank you!

#4

I think what @Mindi is referring to is commonly called the “Mega backdoor Roth IRA”. I might ask your HR about it or do some additional googling. If your employer plan is indeed setup like that, I’d definitely go for it. You can cram all that money into never-taxed-again status!

#5

Just so I’m fully understanding this, the mega backdoor Roth IRA is not capped at a $6k contribution per year, right?

#6

Correct. Quoting from NerdWallet:

The maximum that you and your employer combined can put into your 401(k) plan is $58,000, or $64,500 if you’re age 50 or older, in 2021. To calculate how much you can put into the plan’s after-tax portion this year, subtract your 401(k) contributions and your employer’s matching contributions from that maximum. (You’ll have to add up what you and your employer have contributed so far, and estimate what will be contributed for the rest of the year.) The remaining amount is the total you can put into the after-tax portion of your 401(k).

To do the “mega backdoor roth ira” you’d want to talk to HR or your 401k provider to see if you can do some of those after-tax contributions and convert them to Roth during the same year :slight_smile: