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Subject:  Re: 401(k) vs. Roth IRA Date:  4/25/2004  1:09 AM
Author:  Mark0Young Number:  40683 of 88499

there have been many years in which I maxed out my 401(k) pre-tax contributions and just continued making the same deposits, but on an after-tax basis. The after-tax contributions are disadvantaged compared to just investing the money in a taxable account in a tax-efficient manner.

Yes, when it comes to after tax contributions to a 401(k) or non-deductible contribution to a Traditional IRA, I agree with you: tax-efficient investments in a taxable account are likely to do better! (My choice would be more in lines of VTSMX but that is another discussion.)

Actually, the only advantage I can see for after-tax contributions to a 401(k) or non-deductible contributions to a Traditional IRA would be to "shelter" an investment that throws off a lot of fully-taxable dividends, e.g., taxable bonds or REITs, since that would allow the dividend stream to be reinvested without the annual drag of taxes. But a substantial bond holding would probably be more appropriate when one gets close to retirement, not early in one's wage-earning years.

Well, actually, there is a second reason why one might want to make after-tax contributions after maxing out one's pre-tax contributions to a 401(k): if one or one's spouse works in an occupation that tends to attract lawsuits, the ERISA protection of 401(k) plans may be worth it even though the tax benefits aren't there.
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