I’m putting $300k annually into taxable brokerage accounts – should I be utilizing a mega backdoor Roth instead?

Many people turn to the Fat FIRE Reddit community for the most optimal ways to earn money and reduce taxes. One Redditor did that and shared their predicament in a post.

The individual puts $300k per year into a taxable brokerage account but is wondering if a mega backdoor Roth makes more sense. I will share my thoughts, and commenters shared their thoughts on the post as well. However, it’s good to speak with a financial advisor if you can.

Capitalize on the Mega Backdoor Roth

Most Redditors suggested that the original poster put their money into a mega backdoor Roth. It’s easy to see why.

The withdrawals you make from a mega backdoor Roth are tax-free. You can also accumulate dividends in that account without worrying about taxes. 

While you pay taxes on Roth contributions, you’re also paying taxes on brokerage account contributions. Nothing changes with your current tax bill if you use a mega backdoor Roth.

You Don’t Have to Move All of Your Money

Another key detail is that you don’t have to move all of the money you make into a Roth account. One of the disadvantages of these accounts is that you have to wait until you turn 59 1/2 to withdraw from these accounts without incurring the penalty fee.

However, the Redditor who is making $300k per year can still put most of their money into a taxable brokerage account. That leaves most of their money accessible right now while a portion of their earnings grows tax-free.

Consider Real Estate for Additional Tax Benefits

While moving money into a Roth account can provide tax relief on withdrawals, you can also get tax relief now and in the future with real estate. 

Although Roth accounts can increase your net worth, they don’t protect you from taxes right now. Real estate can serve that function, whether you gradually depreciate your assets or regularly use cost segregation as outlined in section 179 of the tax code.

This part of the tax code allows you to depreciate a real estate asset’s entire value in one year, potentially freeing you from taxes as long as you buy 1-2 rental properties each year. The Redditor has enough funds for down payments since they put $300k per year into taxable brokerage accounts. 

Overall, the Redditor is in a great position. Putting some of their funds into a mega backdoor Roth will help a lot with their long-term taxes. However, other assets like real estate can compensate for short-term taxes since they are prioritizing a Roth account over a traditional retirement account.