Also it seems to me if your tax bracket is pretty low now and will be low later, doesn’t make a huge difference- lets things grow now while also giving you a higher tax refund and lowers your student loan payment if enrolled in an income-based one. There’s not one quick answer for everyone.

I’m pretty sure this is the order of operations that’s recommended by most financial pros that are really in touch. It’s probably not as common though since most people don’t have access to a HSA- it gets glossed over.

Yes! You can do this. Indeed, the best case scenario is if your company allows in-plan Roth conversions on after tax 401(k) contributions. This can be automatic (however I had to call my vendor and request it be activated), but basically it immediately makes all my after tax 401(k) contributions and growth as tax free in a Roth. If I leave the company, I would take that money and roll it into my Roth IRA.

One thing to watch out for is at least with my company the way they do the pre tax match (via a true-up) is they automatically stop my pre tax 401(k) contributions at the limit specified by the IRS. However, they do not automatically stop my after tax contributions. So I have to actually calculate the total IRS limit – pre tax – employer match = after tax contributions. I hope this helps. I actually called my payroll representative to understand this and it’s likely different with every company.

I wrote a few posts on this for further reading as I’m a huge proponent:

millennialmusingsonmoney.com/mega-backdoor-roth/

millennialmusingsonmoney.com/401k-after-tax/

That’s very true, the 10% average return is just an average and everyone will be different based on timing. Averages are not often the reality, some will be higher and some will be lower. Assuming past returns hold true in the future (not necessarily a given), the longer your time horizon you have to invest the more likely it is you’ll hit the 10% return. So for someone just starting their career now and maxing their 401(k) I think it’s reasonable to expect, on average, a 10% return, so long as you are aware that it could end up slightly higher/lower in the end.

And you’re right that there are protected bear markets and recessions, which can drag down the average, but it’s also worth noting that there are also prolonged bull markets as well. So you could very well end up above the 10% benchmark as well, depending on timing. Averages work both ways.

Of course, this is exactly why people generally shift out of equities and into bonds or other more stable investments as they approach retirement age.

I have coworkers who are contributing highly to their 401k, but fail to contribute enough to their HSA and I think that’s a mistake. If you only have enough income to max out one or the other, I think the HSA should have a higher priority. It’s pre-FICA, so its tax benefits are even greater, and it has the potential to be tax-free upon withdrawal, which a 401k doesn’t.

There are a couple drawbacks (20% unqualified distribution penalty, must be 65 to make regular income withdrawals) so it’s definitely smart to invest in both HSA and 401k. Maybe I’m missing something, but it seems to me like we should be encouraging the average person to invest enough in a 401k to get company match, then max out HSA contributions, THEN max out 401k contributions.

“But for high earners currently in the top tax bracket, especially if they anticipate some lower-income years later in early retirement, traditional pre-tax investments now with roth conversions later in those low-income years make a lot of sense to me.”

In early retirement before RMDs kick in is what I hear you saying.

Me too, even though we are not in the top tax bracket. It especially looks attractive if we retire to a state with no state income tax (which we would have already paid without a 401k).

On the other hand. Congress seems more and more determined to limit Roths, to apply RMDs to them, etc. They are also looking for ways to tax us not just on what we made, but on what we might have made. They can certainly change the rules faster than I can implement long-term investment strategies.