Here’s my first world problem of the day:
My company offers post-tax 401k contributions. I have never contributed to my 401k post-tax, thereby paving the path toward a Mega Backdoor Roth, because my employer hasn’t allowed for rollovers from my 401k. Which means I’d either have to not invest those contributions for a long time or instead deal with super annoying tax stuff on the post-tax gains being rolled over from a Traditional to Roth account that I didn’t want to bother with.
But then I realized: I’m leaving in less than two months.
Which makes Mega Backdoor Roth contributions a lot more approachable and a lot less rife with confusion.
The catch, though?: I’m leaving in less than two months. Which means I might not have a salary until who knows when. Which further means liquidity is at a premium. Which means maybe I should favor getting my salary in cash to sit on like a greedy dragon rather than stuff it into my retirement fund for favorable tax treatment.
That said, fiance did just finalize his job offer, so we’re probably in decent shape for a while? We can’t live just off his salary, but a back of the scratch pad calculation indicates his pay plus our emergency fund will last for about three years assuming we more or less follow our joint budget plus personal allowance plan. My last few paychecks would add another six months or so to that runway. That’s assuming I don’t make one red cent (but also that we don’t face any truly expensive emergencies). I can’t imagine being unemployed for that long given how strong the job market is right now, particularly for tech.
On the other, other hand, if I take the cash now, then fiance can contribute correspondingly more money into his pre-tax 403(b) when he starts his new job. Which brings us to the old “take the tax break now or later” debate.
I think I might take the middle-of-the-road path and dump half my pay into Mega Backdoor Roth and the other half keep in cash. If by Q3 I have decent job prospects, we’ll up fiance’s 403(b) contributions so we can utilize both our pre- and post- tax investment space.
Anyway I’m interested in hearing some opinions on the matter:
How much do you value liquidity? Would you go for the Mega Backdoor Roth contributions, pre-tax 403(b) contributions, or stockpile some cold hard cash?
6 thoughts on “How Much Is Liquidity Worth?”
I don’t envy you this decision! Previous me would make sure I had cash. Current me has plenty of resources to tap and would mega-backdoor. Current me wishes previous me had taken better advantage of my additional retirement options, but I didn’t know the future well enough!
Thanks for weighing in! I feel like this is a case where no decision is outright terrible (except maybe throwing all my earnings into crypto, that would probably be a bad call– but also not something I would ever do) so I can’t regret it too much.
I really struggled with this too. In the end, I chose to take advantage of the Mega Backdoor Roth IRA to its full potential. It did leave me the side effect of less cash when I ended up losing my job, but with our current financial situation, I’m really glad I have a $140k Roth IRA instead of having that money in a taxable account. Hindsight is 20/20 though.
A couple notes: (1) once you are no employed, you need to rollover the entire 401(k). That means you need to rollover your pre-tax contributions and your after-tax contributions. I personally wanted to leave the pre-tax portion in place when I left my last employer. (2) if you roll over your after-tax 401(k) contributions to a Roth IRA, then the contributions part of that can be withdrawn just like normal Roth IRA principal. So technically, if you do make the after-tax 401(k) contributions and you move them to your Roth IRA later, you could still later withdraw the money to cover cash flow to fill your finance’s pre-tax 403(b). I don’t recommend that, but it can be a nice piece to know in the back of your head, as a safety net.
On #1 – Did you want to leave the pre-tax in place in order to do a regular Backdoor Roth or for a different reason?
On #2- That’s a very good point! From that perspective the Mega Backdoor Roth has zero liquidity downside, which was my main concern.
On #1- Yes. I wanted to continue doing Backdoor Roth IRA contributions since I knew my husband’s income was over the front door income limit.
It’s too bad your employer doesn’t let you withdraw the after-tax contributions while you are still employed with them. Can you at least convert the after-tax balance to Roth within the plan?
Sadly no. That’ve been cool though. Definitely would have tried to max out Mega Backdoor if that had been the case. Even with the restrictions, in hindsight, I kind of wish I had been more aggressive with it. Oh well. Live and learn.