Shift from Traditional 401k to Taxable Brokerage?

[pjigar]

I’m a big advocate of contributing to an after-tax 401k and converting to a Roth. I’m doing this and it’s helped increase my Roth savings significantly.

The problem I run into is how to balance this with a 401k. Should I fully fund the 401k and the rest into the Roth or fund 401k to company match and the rest in Roth.

I always maxed out pre-tax 401(k) (to save some tax today) then spill over to after-tax 401(k) max out. After I qualified for deferred comp plan, I was able to drop in to a lower tax bracket so now I max out Roth 401(k) and then max out after-tax 401(k). Our projected tax bracket in RE will be same as today so it makes sense to NOT save tax today. YMMV.

PS: We have a relatively small after-tax bucket but it is all real estate which throws a pretty large chunk of cashflow. And we have a growing differed comp account. So we are not worried about covering the gap years.

 

[orbops]

My question around that is, are those Roth conversions accessible 5 years after they were made (so if I started doing it now at 35, I could start accessing this year's conversions when I turned 40), or are they locked down until 59.5 unless you employ a strategy like SEPP or Rule of 55, etc.? Or does that vary by plan/plan administrator?

I retired at 50, and am now 57. My understanding with the Roth 5 year rule since you're under 59.5 is each Roth Conversion has a 5 year hold period and you need to have opened your initial Roth 5 years. You can withdraw your contributions without penalties, but can't touch earnings until you're 59.5 w/o a penalty. For my wife and I, I put all my contributions into a Roth 401K, and the company match by default goes into a regular 401K. The more you put into a Roth 401K now means that between 59.5 and 70, your Roth will serve as the control to determine which tax bracket you want to be in during those years. Here are two good references on the Roth rules:

Two 5-Year Rules For Roth IRA Contributions & Conversions

Mechanics of the 5-year rule for earnings on Roth IRA contributions to be tax-free, and the 2nd 5-year rule for Roth conversion principal to be penalty free!

www.kitces.com

What Is the Roth IRA 5-Year Rule? Withdrawals, Conversions, and Beneficiaries

The Roth IRA five-year rule applies in three situations and dictates whether withdrawals get dinged with penalties.

www.investopedia.com

In terms of maximizing MAGI, at your 24% income level, you're not going to any subsidy. My wife and I are currently on a Silver Package through the Marketplace, and subsidies really drop off around the $110K level. Here's a good marketplace calculator:

Health Insurance Marketplace Calculator | KFF

The Health Insurance Marketplace Calculator, updated with 2024 premium data, provides estimates of health insurance premiums and subsidies for people purchasing insurance on their own in health insurance exchanges (or “Marketplaces”) created by the Affordable Care Act (ACA).

www.kff.org

Regarding your $2.3-2.6M in a brokerage account, it really depends on your spend rate if your child goes on to college. Since you have more equities in your brokerage than your 401K, keep in mind that you need to account for interest and dividends so that it doesn't push you into a higher bracket if the market does well.

 

[pc95]

Details are given below, but my question is given my situation, would it be better to put more money in a taxable brokerage account rather than maxing out my traditional 401k, or should I keep maxing out our 401k's?

My wife and I are both 35, make about $315k before bonuses, putting us solidly in the 24% MFJ tax bracket. We both currently max out our 401k's, and max out our IRA's which we do a backdoor Roth conversion on each year, and are also contributing to a taxable brokerage account. As it currently stands, I have $459k in my 401k and my wife has $265k in her 401k.

I've built out a spreadsheet to track and forecast our investing across our accounts, to see how much we would have saved at different retirement ages. Our goal is to retire before we are 50, with the earliest retirement age likely being 46. If we were to retire the year we turn 46, and we each max out our 401k each year from now until then, factoring in employer matches and using a conservative 4.25% real return, I would have $1.2M in my 401k and my wife would have 1.0M in her 401k (each of our Roth IRA's would have a balance of ~$180k at that point).

If we went that way, our taxable brokerage account would have $2.3M in it. My current plan is to live off of our brokerage account while we either do Roth conversions, or try to minimize MAGI to maximize healthcare subsidies. However, if I cut my 401k contributions to $11k a year, that $12k difference would be worth $8,640 post tax (assuming the 24% tax bracket reverts to 28% at the end of 2025), and doing that from now until we turn 46 would see our taxable brokerage account have a value of nearly $2.6M, while my 401k would still have a value just shy of $1.1M (I have the forecasted higher returns on the taxable brokerage account due to a higher exposure of equities compared to the 401k).


I know the typical investing advice is to max out tax-advantaged accounts before putting money in post-tax accounts, but that advice seems to be aimed more towards people looking to retire at an age where they'll be able to immediately start drawing funds from those tax-advantaged accounts. For those looking to retire early and live off of a brokerage account, does it make sense to divert more funds towards a brokerage account so that when we retire, we have a larger balance to float us until we can start accessing those tax-advantaged funds, or begin pulling on accessible Roth conversions?

Thanks in advance for your thoughts/input.

I wouldn't cut your current native tax benefit to move money into your taxable brokerage as long as you like your 401ks choices/company (ie Fidelity, Vanguard). I like the idea of paying taxes now, as I think they will be going up in the future.