I made a post in a different subreddit about options for 35k I currently have in a CD. It matures in April. A point was brought up that I want to focus on specifically so I figured I post it here.
I want to know if it is tax inefficient to convert the 35k in my 401k using a roundabout method. I was thinking to put the 35k into a HYSA. Then I turn my 401k contributions up as much as possible. This will reduce my paychecks but I can live off the 35k until it's depleted, then return my contributions to normal.
But doesn't this technically mean I'm getting taxed twice on that 35k? Not literally of course, but technically. The 35k is already after-tax money. If I "convert" it to my 401k using the aforementioned method, the extra contributions in the 401k will be taxed later. Offsetting those extra contributions with money that's already been taxed seems tax inefficient. This method only seems tax efficient when using money I didn't earn and get taxed on, like money given as a gift.
If I put the 35k into a taxable brokerage, then the principle 35k won't be taxed again. Only the gains are taxed. So this seems more tax efficient than the first option.
Does this make sense? Am I overthinking it?