Post Tax 401k or Taxable Brokerage Account?

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- It can be withdrawn without penalties (but with taxes) for expenses outside of what an emergency fund would cover.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 Income taxes are not due on any earnings until they are withdrawn from the plan.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).

Answer 1

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.

Answer 2

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.

There is one exception: A few 401(k) plans allow after-tax contributions, in-service rollover, and allow you to roll over only the after-tax amounts. You can then roll the amount into a Roth IRA, pay taxes on a small amount of gains, and after that it will be part of your regular, tax-free Roth account. This is known by many as a "mega backdoor roth."

Answer 3

A benefit of post-tax 401k contributions that isn't mentioned in the other answers: Your plan might allow (as at least some Fidelity plans do) an in-plan conversion of post-tax 401k balances to Roth 401k balances (whereas it might not allow rolling over to a Roth IRA via in-service withdrawals). Only the earnings on the post-tax contributions at the time of conversion would be taxable income. This provides another way to do a "mega backdoor Roth", within the 401k.

Answer 4

I would prefer post-tax-401k instead of regular taxable plan. Like other post said, you have a chance to get in plan roth conversion (This the best almost near Roth IRA equivalent) or megabackdoor roth.

Life is not stopping at 59.5, but may go around 90+ years. At the age of 59.5, you can easily convert Magabackdoor and grow the money tax free for next 30 years which is too good with power of compounding.

Additional benefit, re balancing or sale in after tax 401k is not taxed, your fund can grow faster than taxable account.