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Savings prioritization - employer deferred compensation or after-tax 401k?
10-20-2018, 04:02 PM
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#1
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Recycles dryer sheets
Join Date: Jan 2007
Posts: 131
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Savings prioritization - employer deferred compensation or after-tax 401k?
Hi all, it's been quite a while since joining this forum 10+ years ago. After spending many many days & nights here back then to educate myself and establish a plan I've only visited from time to time while our savings plan has been in action. Recently my megacorp has introduced a couple of new savings options that have me thinking.
As of this year I have access to both after-tax 401k savings (up to $29k) and a deferred compensation option. DW also works at the same company and together we will be in the 35% marginal tax bracket for 2018. We already max out our pre-tax 401k & employer match and for years have done backdoor Roth IRAs and a lot in a taxable Vanguard savings. The new after-tax 401k contributions can be converted multiple times a year into a roth 401k to minimize capital gains. Together this would be $58k for the both of us.
So my question is this.....assuming it's a no-brainer to switch into using deferred compensation and/or after-tax 401k contributions over a normal VG taxable account, which should take priority? I have access to similar investment options (index funds) in each.
DW and I are 42 now and will be fully FI in another 3-5 years. We may or may not RE but will at least downshift into less busy/stressful jobs. We have 8-9 years of living expenses already accumulated in taxable VG, another 8-9 years in traditional 401ks, and 1-2 years of living expenses in roth IRAs. Kids' (2) 529s are well funded and we keep adding to those separately as part of our expected spend.
We would obviously expect to end up in a lower tax bracket when the deferred comp gets paid out after RE but not sure that outweighs potential Roth advantages. Currently we're maxing out the after-tax 401k -> Roth 401k and putting a small amount in the deferred comp.
Thoughts?
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10-20-2018, 06:49 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,204
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If I was ihe 35% tax bracket and expected to be in a lower tax bracket in retiremetn then I would favor the deferred comp... recognizing that there might be slightly more risk with the deferred comp in the event of bankruptcy since deferred comp participants are just general creditors of the company.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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10-20-2018, 08:14 PM
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#3
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Thinks s/he gets paid by the post
Join Date: Jun 2016
Posts: 1,951
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Depends. If you're going to quit voluntarily before age 59.5, you're going to need to have enough after tax assets to get by or else pay a 10% penalty on early withdrawal penalty.
Depending on your tax bracket, tax deferred might not be that much of a savings if your post-employment tax bracket isn't much different than while employed.
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10-20-2018, 08:50 PM
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#4
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Thinks s/he gets paid by the post
Join Date: Jun 2016
Posts: 4,655
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Depends on the terms of your deferred comp plan. At my last company, deferred comp could be accessed without penalty upon leaving the company at any age. Taxes apply when withdrawn, but no penalty. I was considering ER in my early 50’s so I wanted flexibility. Therefore I maxed out deferred comp first, then 401K. This worked well for me. ER’d just after 56th birthday, now 58, and living off deferred comp.
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10-21-2018, 03:28 PM
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#5
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Dryer sheet wannabe
Join Date: Oct 2016
Posts: 24
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I'm assuming you're talking about a non qualified deferred comp opportunity. If so, the answer will depend a lot on the terms of your plan. Some questions/considerations to think about
Is there a match?
Is there a pre-elected in-service withdrawal provision? If so, what is the minimum amount of time the money must be in the plan?
What are the investment benchmarks options? 401k mirror, fixed rate, other?
How do you feel about being an unsecured general creditor of your employer?
What are the distribution options?
Do you plan to relocate post-retirement?
Is there a rabbi trust?
There are lots of potential opportunities/considerations. In general NDCPs can be great options if utilized properly with understanding of the risks and flexibility tradeoffs that exist
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