Have you received an e-mail recommending that you make post-tax contributions or suggesting that you can make post-tax contributions to your PRAP account? If you have and you want to know what to do next, stay tuned.
Hi, my name is Paul Carroll. I'm the CEO and founder of Efficient Wealth Management, a boutique wealth management firm based here in The Woodlands, Texas. If you qualify to make an after-tax contribution, you've probably received an e-mail like this. In that case, you now have to decide what should you do and how should you do it.
First, should you be making after-tax contributions, or post-tax contributions? Our standard advice is, unless you're fairly low on the totem pole with an HEI less than about $110,000 for a married couple, then, no, you shouldn't be making after-tax contributions. The reason is, you're in a fairly high tax bracket. Those after-tax contributions are expensive.
A lot of people would suggest, "Okay, but I'm going to be in a higher tax bracket 30 years down the road." Well, there are a couple of statements there. One is, maybe, maybe not. If you're already in a high tax bracket, it's very hard to call how much different the tax brackets will be, so it's a gamble on the future, and it's not always a good gamble. Second and more importantly is, monies that are put aside in a taxable account, invested in a tax-efficient manner, will result in a greater end game than money invested after-tax in a qualified account, allowed to grow tax-deferred, but then that growth is hit with ordinary income tax instead of capital gains tax and dividends tax, and it's very unlikely that those tax rates will be higher than your marginal tax rate today.
The short answer to question one is, for the vast majority of the pilots, putting after-tax dollars into the PRAP is not necessarily a good idea, unless you need after-tax dollars for some future strategy.
The second part is, if you choose to put in after-tax dollars, what do you do? Simply put, it's not automatic. You have to actually click on a link that asks for the post-tax lump sum election form and mail it in; get it in before the end of the year. For our clients, we're not recommending this. We're recommending you take that money, put it in the cash bucket, invest it long term, or pay off debt. Do something else with the money. You've already paid a lot in taxes for it; you can put it to better use going forward.
We wish you the best of investing success.