Aftertax 401(k) vs. Taxable Account? Evaluating Options for High-Income Savers
Investors must weigh potential tax benefits against liquidity, other needs, when deciding where to steer extra contributions.
The introduction of an aftertax 401(k) option at Morningstar a few years ago left a lot of my co-workers scratching their heads. Should I start making these contributions, my colleagues wondered, instead of traditional or Roth contributions?
In most cases, the confusion could be cleared up by asking a simple question. Are you already making the maximum contribution to a traditional or Roth 401(k)? If the answer was no, then my response was straightforward. "Forget about aftertax 401(k) contributions for now. Concentrate on making traditional (pretax) contributions or Roth contributions until you’re maxing them out."
Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.