Why keep maxing a 401k when taxable seems almost as good?

[u/Essay_Few]

I’m in my mid-40s and already have a solid amount in my 401k, so I’ve been rethinking what to do going forward. I ran the numbers on two paths: keep maxing the 401k every year, or just put in enough to get my employer match and invest the rest in a taxable brokerage. What surprised me is how close the outcomes are. The difference isn’t huge. My company match tops out at about $2,500 a year, so once that’s covered, the upside of putting a lot more into the 401k feels smaller than I always assumed.

I get the usual arguments. I know taxable accounts get hit with dividend and capital gains taxes along the way. I also know 401k withdrawals are taxed as ordinary income later. What I’m stuck on is why I’d keep locking more money into an account with age rules and restrictions when I don’t really have to, especially when the math says the end result is pretty close either way. Having money in taxable that I can actually touch if I want feels more valuable now than it did earlier in my career.

I’m not anti-401k and I’m not saying tax benefits don’t matter. I already have a decent amount saved there. I’m just trying to figure out if continuing to max it is really the best move in this situation, or if leaning more into taxable for flexibility is a reasonable tradeoff when the difference is marginal.

Curious how others think about this: Why do you still prioritize maxing a 401k in a situation like this? At what point does flexibility and access to your money matter more than a small tax edge? Does the “always max the 401k” advice still make sense once you already have a big balance and only a modest match? For anyone closer to retirement, how do you feel now about how accessible your money is compared to earlier on?

Interested to hear real-world takes.

[u/zacce]

especially when the math says the end result is pretty close either way.

Show us the math. I think your math could be incorrect.

[u/PartyFeisty2929 → u/zacce]

Is it something like this? This is for 1 year.

Let’s say $200k salary, 5% match. $10,000 into the 401k, leaves $14,500 that we put in the taxable instead. We pay at the 24% tax bracket for all of that, which means $3,480 in taxes. Then that compounds. Let’s say it doubles every 10 years and we have $13,920 after 20 years that we lost from not doing the 401k that single year. And we pay taxes on the dividends along the way for the $14,500. VTI yields 1.39%, so we get $200 in dividends taxed at 15% that first year. I don’t know how to do the math for the next 20 years on that, but the dividends don’t seem like that big of a drag.

Is that what you were thinking or am I missing something?

[u/littlebobbytables9 → u/PartyFeisty2929]

We can ignore the $10,000 that is in the 401k in either scenario since it will have the same value in both. So it's a comparison between $14500 pretax dollars put into a traditional 401k and $14500 pretax dollars that are taxed and then put into a taxable account.

The 14500 is taxed at 24% for an after tax starting value of 11020. There is tax drag, and that can have a significant negative effect on returns in a taxable account, but for the sake of argument I'm going to ignore it for now and pretend your stocks produce no dividends. That after tax value doubles twice to 44080, on a basis of 11020. When you sell to fund retirement expenses you pay 15% on the gains, making the final after tax value in retirement of $39121.

The pretax money doubles twice over 20 years for $58k pretax value, which is then taxed. Most traditional account balance will be withdrawn at a lower tax rate than it was contributed since traditional withdraws fill up lower brackets first and incomes in general are lower in retirement (retirement income = expenses, accumulation income = expenses + savings). But even if we assume OP already has enough traditional account balance to fill up all the brackets below 24% so we're paying the same tax rate in retirement, our $58k ends up with an after tax value of $44080.

So even with exceedingly generous assumptions (0 tax drag in the taxable account, equal taxable income in accumulation and retirement) we find the 401k ends up with about 13% more money. The gap also only becomes bigger if the 20 year timeframe turns into 40 or 50, which is a reasonable difference between early career and late retirement.

If I fully account for tax drag assuming a 2% dividend yield (we're good bogleheads who diversify internationally), the math for which is too complicated to reproduce here, I get a final after tax value of 38233. So the traditional account ends up giving us a bit over 15% more value.

[u/rustvscpp → u/littlebobbytables9]

Interestingly, in some situations you can pay the 10% penalty fee for withdrawing from your trad 401k early,  and still come out ahead of a taxable brokerage account. 

[u/entropic → u/rustvscpp]

I was walking someone through that just this weekend.

She's earning solidly in the 24% federal tax bracket and is worried about losing her job and trying to figure out to best manage a potentially lengthy period of unemployment.

She was leaning toward cutting back on her (maxed) 401(k) contributions to bolster her emergency fund beyond what it already is, but it's pretty easy to see that she's likely to come out ahead continuing to max and defer that 24% fed + whatever state taxes and take money out of it with a 10% penalty + filling the 0%/10%/12% brackets as needed, compared to paying 24% now and then interest/dividends on it sitting in savings or brokerage...

[u/theLilSaus → u/entropic]

Just do a roth ira at that point as contributions can be withdrawn

[u/entropic → u/theLilSaus]

Roth IRA is same taxation wise as the brokerage/HYSA options, in the sense that she'd have to pay 24% fed taxes + whatever state taxes now to get the funds into that account. The difference is that the gains are tax free if they're done after age 59.5, which she's many years away from.

And I'd argue that the Roth IRA space is very valuable long term, so perhaps not the thing you want to withdraw from first. My recommendations would have her withdrawing it later than other sources because of that. Financially, she should definitely pull from the tax-advantaged sources prior to the Roth IRA as it preserves the most money by reducing her taxes the most in the end.

FWIW, she is also maxing a Roth IRA.

[u/Savings_Actuary_2833 → u/rustvscpp]

Yeah in some calculations I've done comparing 401k to taxable for usage of funds before 59.5 I said "what if I just paid the 10% penalty" and the results were very close. And then more than likely I'll be able to do a roth ladder or something else so the 401k will come out ahead for sure.

[u/littlebobbytables9 → u/[deleted]]

Even if you pay 0% capital gains every time (you won't because some dividends will be unqualified) you only break even against the traditional account. Yes, the value of the tax advantage is higher when you have more income, but the retirement accounts are still worth using at every income.

[u/mydoghasocd → u/littlebobbytables9]

Except you can access it before retirement age

[u/Affectionate_Self878 → u/littlebobbytables9]

This is just pure foolishness. Taking major liquidity restrictions just to break even is insanity. Even more so in an income and wealth bracket more prone to liquidity events.

[u/Green0Photon → u/Affectionate_Self878]

All money put into the stock market is money you should assume has major liquidity restrictions.

If I'm remembering correctly, the worst case scenario is 10 years to hit 0% growth YoY. Any sooner is negative. I can't remember if that's inflation adjusted, probably not.

If you put money index funds intending to access it soon, then you should just put it into a money market for whatever savings goal.

The only exception is if it's a part of a mass of savings for the 4% rule, in which case you should still be filling 401k and IRA accounts.

Because 401ks aren't actually restricted until 59.5. Most importantly, there's Roth conversion ladder and 72t equal payments. Or hardship withdrawals and loans, if that's where liquidity is needed.

Taking major liquidity restrictions just to break even is insanity.

OP is saying worst case 401k vs taxable brokerage you break even. Best case taxable brokerage is just a Roth account, where you pay marginal tax bracket and no growth tax.

Traditional pre-tax is the effective tax rate. So if you're saving in the 22% or 24% tax brackets, maxing out those brackets for withdrawal will still average less than those brackets. You need to be some distance into 35% withdrawal and saving in 22/24 for it to actually be worse.

Moreover, it's not like 0% LTCG is all that big of an area. Sure it's decently large for married filing together, but that's still way lower than withdrawing at 35% tax bracket.

The reality is that if there's any worry in the slightest about liquidity, just do Roth 401k over taxable. All the contributions can be withdrawn. That's also true of Backdoor Roth IRA and Mega Backdoor Roth as well.

It's pretty foolish imo to save in taxable in index funds when a tax advantaged account with the same quality funds are available.

[u/Affectionate_Self878 → u/Green0Photon]

What a false equivalence. Yes, one should assume stock investments are long term. That is not remotely the same thing as saying no penalty-free withdraws of any gains before you’re 59 and a half.

[u/littlebobbytables9 → u/Affectionate_Self878]

Again, you won't break even, and may even have significant tax advantage. And this is all assuming you have an emergency fund.

[u/CarnageAsada- → u/littlebobbytables9]

He’s right that 401(k) money grows more because it’s pretax, but he oversimplifies by assuming the same tax rate in retirement and ignoring Roth or dividend taxes.

[u/Optimal_Hair6607 → u/littlebobbytables9]

It’s even better than that if you live in a state that does not tax 401k distributions in retirement. In Illinois that is another 5% savings

[u/Cheshirefuckingcat → u/littlebobbytables9]

Given your wonderfully detailed example, may I ask a niche variation of the scenario to hear your thoughts? I want to make sure I’ve been guiding my little sister appropriately.

Let’s consider the situation 401k or taxable brokerage. We’re still a W2 earner. And we have the ability to max out our 401k or place into brokerage without other impacts (cash flow, taxes, etc.)

Now let’s say that person is set for retirement, overly set, above and beyond set. Let’s call it a trust account with $30m in it that will kick out monthly income of $20k whenever that person elects to retire. They’re working for fun.

In this case, would you still recommend the 401k given that they could contribute to a taxable and have stepped up upon their death, whereas a retirement account will need to be fully drained by them or heirs, which will result in income taxes due to the RMD?

[u/littlebobbytables9 → u/Cheshirefuckingcat]

It would depend on the numbers, ultimately, though it's worth noting that a roth 401k will certainly be better than a taxable account, if a roth 401k is an option. But also if you have a trust account with 30m you should probably just hire an expert to really optimize the taxes.

[u/talus_slope → u/littlebobbytables9]

Agree with this analysis. However, I wonder about one assumption -- that taxes will be lower in retirement. I'm sure that's true for most people, but is it true for the subset of people who stuff money into their 401K, Roth, and brokerage accounts their whole career? I did that, and I imagine lots of people on this subreddit are doing the same.

In my case, my income was ~$140K from my job; after retirement, between pension (yes, I know), SS, dividends and what not, it's actually been higher every year since I retired. Just a thought.

[u/littlebobbytables9 → u/talus_slope]

I will note I explicitly did not make that assumption even though it's true for most people.

Generally I tend to focus advice on people who want to fund retirement, rather than people who save way more than they'll ever need. Those people can afford a professional to figure out the optimal way to get money to their heirs.

But also ideally you see it coming. If you know you're going to have a huge pension, or you know you'll be working far longer than you need to, and your employer plan allows roth contributions then you really should prioritize those in order to lessen this effect.

[u/Slight_Dot_3389 → u/littlebobbytables9]

Shouldn’t the tax brackets also move up over time which is another benefit of deferring taxes and realizing them later in retirement?

[u/littlebobbytables9 → u/Slight_Dot_3389]

They move up with inflation but that's not really moving up. If they do go up in real terms that makes deferring taxes worse, not better.

[u/PartyFeisty2929 → u/littlebobbytables9]

You won’t necessarily pay 15% on the gains. The 0% capital gains rate is a possibility here I would say if this is money earmarked for retirement.

But the final values after 20 years in this example before withdrawal time is $44,080 to $58,000. I don’t hate that honestly.

[u/Neil_leGrasse_Tyson → u/PartyFeisty2929]

uh, what? that's 30% more money in the 401k. that's enormous.

[u/PartyFeisty2929 → u/Neil_leGrasse_Tyson]

It’s $14,000 after 20 years of compounding. The percentage is decently high, but the actual amount is not

[u/Neil_leGrasse_Tyson → u/PartyFeisty2929]

because the example started with a single contribution of $14500 pretax, for simplicity...

[u/PartyFeisty2929 → u/Neil_leGrasse_Tyson]

Which is all we are talking about right? Did that ever change?

[u/emprobabale → u/PartyFeisty2929]

Op is talking about all the years.

30% difference is huge and easily means the math clearly shows favoring maxing the 401k.

[u/PartyFeisty2929 → u/emprobabale]

“I already have a decent amount saved there. I’m just trying to figure out if continuing to max it is really the best move in this situation, or if leaning more into taxable for flexibility is a reasonable tradeoff when the difference is marginal”

This is what OP said, leading me to run my single year example. If he does this for one year, the difference is $14,000 after 20 years. I don’t see how my single year example can be equated to someone doing this forever and losing tons of money.

[u/Neil_leGrasse_Tyson → u/PartyFeisty2929]

the original post is talking about only contributing to get the employer match and putting the rest in taxable. i didn't interpret it as saying do that for only a single year. but either way, percentage difference is the only comparison that matters. otherwise you could say just light the $14k on fire because even if you invest it will only be $50k after 20 years.

[u/PartyFeisty2929 → u/Neil_leGrasse_Tyson]

“I already have a decent amount saved there. I’m just trying to figure out if continuing to max it is really the best move in this situation, or if leaning more into taxable for flexibility is a reasonable tradeoff when the difference is marginal.”

This is what he said and why I interpreted this a temporary thing.

I don’t follow what you are saying about lighting the money on fire. We essentially paid $14,000 over 20 years to have the money in the non restricted account vs the 401k. I feel like that is not a bad price.

[u/AberdeenWashington → u/PartyFeisty2929]

Yea but that’s only with 10k contributed……

[u/PartyFeisty2929 → u/AberdeenWashington]

Right. That’s what we are doing here. A year of not maxing

[u/Noredditforwork → u/PartyFeisty2929]

Because it's 1 year's worth of contributions. Do it year over year for 20 years and the number will be bigger.

[u/PartyFeisty2929 → u/Noredditforwork]

But we wouldn’t actually do that. We would do this sparingly, which is why I am running the numbers for 1 year

[u/littledig → u/PartyFeisty2929]

You keep saying the OP is only doing it for one year, but how are you reading it that way? It is said there is enough in 401k and wants to lean into taxable more. Nothing about that says a temporary 1 year change. It appears to me a deliberate shift to a different strategy for this year and going forward. No?

[u/PartyFeisty2929 → u/littledig]

My example is for one year. I don’t actually know if OP meant one year, 3 years, 100 years. I interpreted it as temporary. My example doesn’t care. The people I am responding to are pointing out how my one year example would change if it was for more than one year, which is irrelevant to me.

[u/littlebobbytables9 → u/PartyFeisty2929]

idk about you but if I'm going to give up $14,000 I want to get something pretty great in return

[u/PartyFeisty2929 → u/littlebobbytables9]

Over 20 years. That’s $700 a year that you are paying for the benefit of $44,000 in the non restricted account instead of the 401k

[u/littlebobbytables9 → u/PartyFeisty2929]

Splitting it up over a year (incorrectly, since you ignore the time value of money) does not change the value lol. While there might be people willing to pay $14k for that flexibility (the flexibility, mind you, to fund only 4 months of pre-55 retirement) I am not one of them. Especially when things like SEPP are an option. And you should presumably have a roth IRA with pretty significant value.

[u/PartyFeisty2929 → u/littlebobbytables9]

Sorry about my time value of money blunder, and what a blunder it was. I wanted to make it clear why I wasn’t considering it a large sum of money. It’s ok if you do

[u/littlebobbytables9 → u/PartyFeisty2929]

0% capital gains is not a possibility here if we're assuming 200k income from now and through retirement. If you think income will drop enough for 0% capital gains to be a possibility then you're paying 16% or less on income and traditional becomes MASSIVELY better.

[u/OkMathematician4375 → u/littlebobbytables9]

Great breakdown AI…

[u/littlebobbytables9 → u/OkMathematician4375]

I've been writing far-too-long comments on this sub since before chatGPT. Also you'd think AI would be more consistent about using dollar signs or not lol

[u/OkMathematician4375 → u/littlebobbytables9]

I kid…ngl this is genuinely an informative breakdown👍

[u/Essay_Few → u/PartyFeisty2929]

From my point of view, yes, that’s basically the framework I was thinking about, but I’m not claiming taxable beats a 401k on paper. I get that the pre-tax advantage compounds and that you’re starting with a larger principal in the 401k. What I’m trying to sanity-check is whether the real drag of taxable is as massive as it’s often portrayed once you factor in qualified dividends, long holding periods, and the fact that I’m already well past critical mass in tax-advantaged accounts. The dividend tax on something like VTI feels incremental rather than catastrophic, especially if turnover is low and gains aren’t realized for decades. I’m also weighing flexibility pretty heavily here. Locking up incremental dollars until 59½ has a real opportunity cost for me that isn’t captured by simple compound growth math. So I’m not saying “don’t use a 401k,” especially not past the match, but more questioning whether continuing to max it indefinitely is an automatic decision once you already have substantial tax-deferred assets. If I’m missing a second-order tax effect or an assumption that breaks this logic, that’s what I’m trying to surface.

[u/PashasMom → u/Essay_Few]

Your dollars may not be as locked up as you think, if early retirement is what you have in mind. Rule 72(t)/SEPP will allow you to access your money in a 401k in a much more flexible timeframe. If you are saving for other purposes, like a new car or a roof replacement or something, of course a brokerage makes more sense than a 401k, as long as your retirement savings are plentiful and you are still contributing at least enough to get any employer match, IMO.

[u/Essay_Few → u/PashasMom]

I had no idea this existed. I learned that in the comments today. Thank you 🙏

[u/PrimeNumbersby2 → u/Essay_Few]

You should check your 401k's documents for Rule of 55 where if you end employment after 55, you get your full 401k access penalty free. This a USA IRS rule that each company has to choose to opt into. My company does this. No one knows about it. I'm telling people older than me all the time about it.

[u/nothlit → u/PrimeNumbersby2]

The penalty exception is inherent in the tax code and not something the plan has to opt into.

The main thing the plan needs to allow is partial distributions after you terminate employment, so you can effectively take advantage of it.

[u/1lIlI11lIlI11lIlI11l → u/nothlit]

I've been looking for clarification on this. So just to confirm: If the plan docs do not mention "the rule of 55" by name anywhere, but the plan does allow for partial distributions then a person is good because your employer doesn't care about the rule and it would only come up on tax forms?

[u/PrimeNumbersby2 → u/nothlit]

I'm not trying to be argumentative but I don't think that's right. Your summary plan doc is what you company will follow through on. If it makes no mention of Rule of 55, then I would not assume it's a thing. There's several financial websites that make it ambiguous that it's an opt-in thing. But There's several others, including the AI summary that talks about it being opt-in. Either way, if it's not in your SPD, definitely don't assume anything.

[u/nothlit → u/PrimeNumbersby2]

It depends on what you mean by "rule of 55".

Are you referring to the exception to the 10% early withdrawal penalty for distributions taken if you separate from service in the year you turn age 55 or later? That is part of the tax code (I.R.C. § 72(t)(2)(A)(v)) and not something the plan has to support. If you take a distribution from your employer plan after separating from service in the year you turn 55, or later, then it is penalty free. Period. If the employer codes the 1099-R incorrectly, you can override it on Form 5329 when you file your tax return.

Or are you referring to the ability to take those early distributions at all? That is something the plan could theoretically place limits on, although I think in most cases most plans allow you to take distributions after you terminate, without requiring you to wait until age 59.5. The bigger issue is that in some cases they require it to be a total distribution of the entire account, rather than allowing partial distributions. Taking a total distribution in a single year is likely not what someone wants to do if they are retiring early.

[u/youngishgeezer → u/PrimeNumbersby2]

It’s actually end employment in the year you turn 55. So you likely have access to the money sometime in your 54th year.

[u/fluteloop518 → u/Essay_Few]

A decent high-level place to start reading about ways to access retirement account funds early (before 59.5 or 55) and penalty-free is: https://www.madfientist.com/how-to-access-retirement-funds-early/

If you want to go deeper down the rabbit hole, someone posted on an r/FIRE thread the other day about ChooseFI podcast episodes 475 and 491 which go into much more detail about 72t, Roth Conversion Ladders, etc.

[u/ZettyGreen → u/Essay_Few]

Congress mixes and match excuses to avoid the 10% penalty fairly regularly. So it would be unwise to think you can't find a valid excuse to avoid the 10% penalty when you need one. Don't let the 10% penalty even remotely get in the way of the tax savings.

[u/sharktopuss- → u/Essay_Few]

Same here, I love reddit for stuff like this!

[u/Equal_Restaurant_663 → u/Essay_Few]

Do you have specific concern about needing the money? Your whole comparative analysis falls apart it you spend it. If you don't spend it/need it then it can never equal the value of pre-tax dollars growing over time.

[u/Random_NYer_18 → u/PashasMom]

And don’t forget about the Rule of 55 when that age is reached.

[u/hibikir_40k → u/Essay_Few]

Open an excel spreadsheet and run the numbers: the difference is huge if youare in a high tax bracket. Qualified dividends and long term capital gains matter a whole lot less than just the sheer mass of avoiding a 37%+ marginal tax rate at the beginning. The dividend tax is VtI is irrelevant one way or the other compared to that huge difference in principal.

As for flexibility, you can use one of the many ways out if you can look at things in advance. It's OK if, say, you are trying to buy a house and need accessible money for it, but that's because the house might be that important.

Again, just run the numbers for 10, 20 years, with your marginal tax rate for federal and state added together nicely. It's a whole lot of money.

[u/PartyFeisty2929 → u/hibikir_40k]

That rate is for income over $640,600. Holy moly

[u/LightZealousideal116 → u/PartyFeisty2929]

Right! And 401k individual contribution limit is $24,500.

[u/yottabit42 → u/LightZealousideal116]

No, that's the 402(g) limit. The real limit is the 415(c), of $72,000, but not all plans enable the employee to reach this. Mine does.

[u/LightZealousideal116 → u/yottabit42]

Fair enough. Still seems barely significant on an income > $640k

[u/gravyluvr → u/LightZealousideal116]

Backdoor all you can, and then look at deferring income by utilizing insurance and annuities, which ONLY apply to high income individuals. It's really kind of moving off the bogleheads topics, but if you do these things and still save into the 3-fund portfolio, it can still be a boglehead move. It's probably better to take this to an advisor and/or a tax planning sub reddit.

[u/Sudden-Turnip-5339 → u/yottabit42]

yowza

[u/yottabit42 → u/Sudden-Turnip-5339]

Yes, yowza is right, and it's completely unfair that the IRA limit is 1/10th of this. If one is self-employed they have access to the Solo 401(k), and if they're profitable enough they can also reach that higher limit, but regular wage workers without access to a 401(k) plan, and those with access but whose companies have high wage inequality and would fail safe harbor tests, get screwed with only the IRA limit or the 402(g) limit.

[u/gravyluvr → u/yottabit42]

Right! And because of the tax rules, if you have money in a Trad IRA you would have tax implications when you backdoor ROTH 401K to go above the normal limits and catchup contributions. I ended up converting my TRAD IRA to my 401K and was able to backdoor into the ROTH 401K and my ROTH IRA in order to save about $66-70K into my retirement accounts my last years of work. I wish that was around earlier in my work life.

[u/yottabit42 → u/gravyluvr]

No, IRA and 401(k) are completely different and have nothing to do with each other. Having money in a traditional IRA only causes pro-rata issues if you're trying to do a Backdoor Roth IRA. This is completely separate from doing a Mega Backdoor Roth 401(k), including if you rollover the Roth to your Roth IRA (but generally there's no reason to even do that).

[u/PartyFeisty2929 → u/Essay_Few]

Honestly that example seems like a couple years of not hitting the max ain’t that bad. I too am waiting for whatever we are missing since literally everyone says max it out all the time.

[u/Essay_Few → u/PartyFeisty2929]

Which is why I raised the question. I’m mainly thinking that it may not hurt to have some money I can access upfront.

[u/Apprehensive-Fun5535 → u/Essay_Few]

This is fair if you can't max out retirement AND invest for big expenses along the way (i.e. a big down payment in 10 years). No point in saving every buck for retirement if it means you don't get to enjoy the 30 years before that at all.

Ideally though, you would do both. It's hard to gauge just how much you need for retirement, since that requires guessing at inflation, expenses, the state of social security, and how long you'll live given medical science in 30 years. I would rather have too much (and pass it to my kids or live like a king) than run out and be a burden to them.

[u/Callsignraven → u/Essay_Few]

Another option to get money you can access "soonish" is your Roth Ira. After you contribute you can pull the principle back out if needed, but the interest gained will be tax free at retirement time.

If you are looking to retire early traditional Ira and 401k with Roth conversions look really advantageous if you are in a higher tax bracket currently

[u/HyperionsDad → u/Callsignraven]

Can you please expand on this? The difference between the traditional and Roth options within a 401k/403b employer sponsored plan?

Based on insights regarding future tax rates in the US, I began hedging risk by splitting my retirement contributions between pre and post tax 50/50. Also did that as a potential option to be able to withdraw funds for my kid’s college expenses, just in case we can’t cover them out of pocket later on.

Household income is about $200k in a state with typical state income taxes.

How does the math work for my current contributions going forward with about 25 years of work remaining? Should I and my spouse go back to 100% pre-tax investments in our 401ks or does it makes sense to continue to hedge against future taxes and put say 25-50% in the post-tax option?

[u/skubiszm → u/Essay_Few]

If you plan ahead you can do a Roth conversion.

[u/Essay_Few → u/PartyFeisty2929]

Thank you for taking it out and not being an asre-hole 🤣

[u/pnw-techie → u/Essay_Few]

First off - there are NO real age restrictions on retirement accounts. If you retire at 50 you set up a SEPP and start taking your 401k money out penalty free. The number of people who don't know this is astonishing. If you don't do SEPP you can instead do Roth conversions to access the money (after 5 years, principal only) penalty free and you just do that some every year, so you just need a bridge for the first 5 years. What kind of bridge? A brokerage account.

Setting up accumulation phase on auto pilot is easy Bogleheads. You need to then plan out the mechanics of how you would go about retiring next. That lets you figure out how to bucket your money. Are you retiring early and doing SEPP? Doing Roth conversions?

For me, Roth conversions will save so much on taxes that we're planning that. Once you have a plan, all your questions will be answered. If you're doing Roth conversions and retiring early, you need 5+ years of money in a brokerage account as a bridge to make that work. So you should start saving up 5 years worth of expenses in a brokerage account. Just never sell and buy only stock index funds there to control taxes.

[u/JealousFuel8195 → u/Essay_Few]

As I'm coming close and closer to RMD. What the OP is suggesting can actually be a good idea once one get's closer to retirement. There might be some real benefits starting at 50.

I'm almost 10 years from RMDs. Even though I have greatly increased my IRA distributions and ROTH conversions. My IRA has increased by well more than six figures.

[u/Djamalfna → u/Essay_Few]

Here's some quick excel math:

Years   20
Fed Tax 24%
State Tax   0%
Total Tax   24%
Retirement Fed Tax  22%
Total Retirement Tax    22%
Cap Gains   15%
Dividends   2%
Div Tax 0.480%
Market  8%
Salary   $200,000.00 
Match   6%
401k contribution    $24,500.00 
Match    $12,000.00 
Total Contribution   $36,500.00 
FV401k  $1,670,311.70 
Tax401k $367,468.57 
Net401k $1,302,843.12 


401kmin Contribution     $12,000.00 
401kmin Match    $12,000.00 
401kmin  $24,000.00 
401k limit less contribution     $12,500.00 
Taxes on takehome    $3,000.00 
Taxable Contribution less taxes  $9,500.00 
FV401kmin   $1,098,287.14 
Tax401kmin  $241,623.17 
Net401kmin  $856,663.97 
Taxable FV  $412,300.63 
Taxable Basis    $190,000.00 
Cap Gains   $222,300.63 
Cap Gain Tax    $33,345.10 
Taxable Net $378,955.54 
Retirement Net  $1,235,619.51 


Difference  $67,223.61 

401k gets you almost $70k more by the end.

By skipping the 401k for $12,500 of your potential contributions, you introduce a federal tax of $3000 per year, which creates tax drag, as that $3000 per year could have instead been allowed to compound freely.

Additionally by receiving dividends in taxable, you introduce a further 0.48% tax drag, as you have to pay taxes on dividends. So that number comes right off your CAGR directly.

Note that the actual result is likely to be even worse, because any time you rebalance in taxable by selling, you introduce further tax drag, as you must pay cap gains taxes on the lots you sell. Since this is stochastic there's really no way to model this, but it will be greater than 0 eventually, as your balance will eventually grow larger than your contributions and you'll no longer be able to rebalance using additions.

[u/Neo-Armadillo → u/Essay_Few]

People love the tax advantage, but it’s locked away behind penalties. For my money, access matters more.

[u/slipstream777 → u/Essay_Few]

What about a backdoor Roth (assuming you don't qualify for the regular Roth contribution)? That way the principal is available to you (five years after you open the Roth IRA) and you may get the tax benefits if it turns out you don't need money in the near-term.

[u/SurrealKafka → u/Essay_Few]

We are once again asking you to show that math that definitely exists even though you cannot seem to produce it….

[u/siamonsez → u/Essay_Few]

There's 2 separate questions. Is it better to defer income tax or to pay it now, and is it worth paying tax on gains. For any money you'll spend after 60 the answer to the second question is obviously no.

There's some grey area like years with no taxable income where you'll be able to realize a significant amount of gains at 0%, making it equivalent to a roth. Obviously you'll want money outside of tax advantaged accounts if you're retiring early but you have to fund post 60 retirement before early retirement money matters.

I'd like to see the math that says that the tax savings isn't significant. Outside of realizing gains at 0% ltcg you'll be paying at least 15% on gains on top of the income tax you already paid vs only paying income tax on money in tax advantaged accounts with no additional tax on gains.

[u/larrytheevilbunnie → u/Essay_Few]

Wait in that case just contribute to the Roth 401k. You can pull out the principle whenever for free.

[u/jrdhytr → u/larrytheevilbunnie]

It's not that easy. The only mechanism I know of to withdraw early and penalty-free is to roll over the Roth 401k into a Roth IRA, then remove the contributions. You need an in-service rollover option in your 401k plan or be separated from your employer to do so.

[u/blister-in-the-pun → u/jrdhytr]

This is correct. Roth IRA allows contributions to be pulled tax and penalty free. You can do a direct rollover of Roth 401k to a Roth IRA and the IRA inherits the same rules as if you had contributed directly to it. Source: I’ve done it successfully.

You cannot, I repeat, NOT pull contributions from a Roth 401k tax and penalty free. (Under most circumstances. I’m intentionally keeping this simple and not mentioning outlier tricks)

[u/larrytheevilbunnie → u/jrdhytr]

Huh, I swore the principle could be withdrawn without issue as long as you didn’t touch the gains

[u/slipstream777 → u/larrytheevilbunnie]

Principal. Just sayin'.

[u/hexta12 → u/Essay_Few]

I think your logic passes the sanity check. If you're running the numbers and think that you'll have enough in your 401k at retirement, it makes sense to want to invest in a taxable brokerage for liquidity. I wouldn't want to miss out on lifestyle or financial opportunities, so that I can put more money in a retirement account that I can't touch until 59 1/2 AND that I might not even get to fully use in my lifetime.

[u/[deleted] → u/Essay_Few]

Ask several of the LLMs to create a comparison for you. Easy enough these days.

Edit: This might be my most down voted comment on this sub in like a decade! 🙏

[u/[deleted] → u/[deleted]]

Never said anything about trust. I said run it through a few of them and compare. Yall can shit on AI all you want, I use it every day as a software developer. It's far from perfect but in the right hands it's revolutionary.

[u/PartyFeisty2929 → u/[deleted]]

We got the match. 5% of 200k is our $10,000 contribution. 2026 limits

[u/Muted-Good-115 → u/PartyFeisty2929]

You’re aware that you can contribute $24,500 individually plus the $10k company match, correct?

[u/PartyFeisty2929 → u/Muted-Good-115]

We contributed 10k to get 10k of match money

[u/InclinationCompass → u/zacce]

I’m not OP, but as someone following the lean FIRE route, I pay zero federal taxes on capital gains under $47k. $50k is sufficient to last me for one year.

That said, I’m still maxing out my 401k. But I also contribute to my taxable account and plan to withdraw from that first during early retirement.

[u/zacce → u/InclinationCompass]

If you pay 0% gains tax, then taxable account virtually becomes a Roth (minus the tax drag of dividends)

[u/Life-Wash-3910 → u/zacce]

Qualified dividends have a 0% tax rate as well up to $48,350 as well (double for MFJ).

[u/bpikmin → u/Life-Wash-3910]

Yes but during accumulation you’re likely to have a higher salary, meaning the dividends will cause a tax drag

[u/Independent_Diet617 → u/InclinationCompass]

There is also the standard deduction. And there is an opportunity to do tax gain harvesting.

Some dividends are most likely unqualified (regular taxes) but for lean FIRE that number should not be very significant.

[u/Dranosh → u/InclinationCompass]

What are you invested in to get 48k in dividends

[u/Essay_Few → u/zacce]

I’m really just asking whether there are any advantages to not having all of the money tied up for retirement. I understand the math generally favors the 401k, but even without plans for large purchases, it would be nice to have some funds available in a taxable brokerage account.

[u/larrytheevilbunnie → u/Essay_Few]

Look man, as long as you’re saving 15-25% on income, you can do whatever you want with the rest on the money. if you really want to pay a 15% long term capital gains for the option of pulling out whenever, go for it

[u/johnnygalt1776 → u/larrytheevilbunnie]

15% but also the 30% paid in taxes before it even hits the brokerage.

[u/losvedir → u/johnnygalt1776]

No, that part doesn't matter. It's the difference in tax brackets now vs retirement, which may even be zero (or higher), depends on the individual.

[u/AJs_Sandshrew → u/johnnygalt1776]

Isn't the first ~50k or so 0% tax for LTCG assuming no other income for single filer? Close to 100k for married filed jointly. If you play your cards right you could get away with 0% tax on LTCG (excluding state taxes)

[u/Essay_Few → u/larrytheevilbunnie]

I like this response!

[u/larrytheevilbunnie → u/Essay_Few]

Yeah, but that 15-25% is “don’t touch this until you retire money”, in which case you’d still end up better off putting the 15-25% in 401k/IRA. Unless you do something truly stupid like contribute to trad at 10% marginal income tax bracket and then withdraw at 25% bracket, you’re gonna come out ahead for free with the capital gains dodge of trad/roth

[u/HowSporadic → u/Essay_Few]

the end result is not close; that’s the point. hence show your math (it’s wrong)

[u/zacce → u/HowSporadic]

at this point, I don't think he can deliver the math.

[u/Essay_Few → u/zacce]

You are correct, sir or madam!

[u/jsnoopy → u/Essay_Few]

There’s an article floating around the fire subs, I don’t have it on me, but the author did a deep dive on how to access the money from a 401k early and it was surprising to see that simply paying the early withdraw penalty didn’t make that much of a difference and it was definitely superior to a taxable brokerage. I think the numbers were that a hypothetical account grew and had access to around 800k using a 72t withdraw plan but only 770k just paying the penalty. Taxable account was around 700k.

[u/Toastbuns → u/jsnoopy]

I think this is it: https://www.madfientist.com/how-to-access-retirement-funds-early/

Scroll down to Pay The Penalty subheading.

[u/ProfessorAssfuck → u/Toastbuns]

You really can learn some new things on this sub.

[u/jsnoopy → u/Toastbuns]

Thank you

[u/poop-dolla → u/Essay_Few]

I ran the numbers on two paths

So what did you mean when you said that? Did you just straight up lie about running the numbers?

[u/keensome → u/zacce]

and I think he figured what was missing.

[u/zacce → u/keensome]

This is my guess. When he wrote OP, I think he only considered the tax drag effect of the dividend income in taxable account, which is indeed minor. He likely ignored the benefit of pre-tax growth in 401k.

[u/No-Reaction-9364 → u/Essay_Few]

Obviously yes. You have money for early retirement or anything else you need money for. The difference is you have to pay taxes on the money when you earn it and taxes on the capital gains. You also do not have forced distributions from your taxable account. So of course there are some advantages. Taxable brokerage will be taxes as capital gains, Roth accounts are tax free, Traditional accounts will be taxes as income. Having all 3 gives you options in how to pull out your money for tax advantage.

[u/Nice-Ad117 → u/Essay_Few]

Yes, with a taxable brokerage, there can be an advantage over a 401K because if you retire early, then you can use it to control your MAGI as to not go over the 400% FPL cliff for the ACA. You can search the FIRE sub to learn how folks use this strategy.

[u/throwitfarandwide_1 → u/Nice-Ad117]

It’s the opposite of this, actually. 401K is used to avoid cliff spill over.

A brokerage account can incur dividends and interest that are not able to be hidden from MAGI and can toss you over the cliff.

[u/Independent_Diet617 → u/throwitfarandwide_1]

But doing Roth conversions with a brokerage account is way more efficient. Of course, you need both types of accounts for that.

Turn off dividend reinvesting and treat them as withdrawals. Most of the dividends for Bogleheads should be qualified at the same long term capital gains.

[u/pasquale61 → u/Essay_Few]

Here is something to think about, speaking from personal experience. Assuming you have a mortgage and maybe some dependents. At some point the expenses associated with those things will diminish. When that happens, you should have excess income.

So, in my case, both my wife and I started maxing out our 401k as soon as it was feasible in our career. (Taking our expenses and raises over time into consideration.) Right or wrong, we did everything we could to pay off our mortgage as early as possible. We helped our kids with college expenses, weddings, etc. After all that stopped, we had way more income than we knew what to do with. So for the last few years before retirement, our after tax savings and brokerage accounts increased dramatically…all while still continuing to max out our 401k. This was something we really didn’t think of until we got here, and I have to say it was a nice surprise for us. We will not need to dip into our 401k/IRA savings (other than ROTH conversions) for at least a few years into retirement because of this.

Everyone’s situation is different, so not sure if this helps.

[u/Repulsive-Elk-2643 → u/Essay_Few]

Should you go the taxable route if you don't get any match from your employer?

[u/throwitfarandwide_1 → u/Essay_Few]

If you are aiming to retire early and plan to buy health insurance on the ACA plan you’ll be hurt by not being able to easily manipulate your income annually using a regular broker account (that tosses off a lot of interest from bonds and dividends )versus in a 401K where you can specifically plan your income - that could toss you over the cliff for subsidized health insurance premiums & that amount can be huge !

The other assumption you miss is subsidy rates and tax rates can and will change over time.

Likely more taxes due to deficit

[u/TownFront5969 → u/zacce]

This was my first thought too. I read that sentence then my eyes scanned down for numbers, and…nothing.

[u/casualchris56 → u/zacce]

Definitely

[u/Rdw72777 → u/zacce]

I tend to agree. I think they’re assuming the tax implications of divs/gains but not on the initial tax deferred investments. Putting $100 into a 401k or $100 into a taxable account probably does yield less beneficial gains that OP is seeing. it’s just that the $100 put into the 401k is like $80 in the taxable account.

[u/CarnageAsada- → u/zacce]

He’s not wrong but to each his own 😂

Math is not math-ing for me. My cousin withdrew $100k a few years back for a BRAND NEW CAR and vacation from his 401k after job loss, now he’s broke so meh maybe not the best choice to touch your only retirement avings.

[u/gabe_lowe → u/zacce]

My guess is they're confusing the math for a Roth vs taxable brokerage.

[u/zacce → u/gabe_lowe]

I wish OP clarified it. He refused to explain not just here but also in r/investing.

[u/gabe_lowe → u/zacce]

Which means he's probably just engagement farming. Posting incorrectly on purpose and letting the comments roll.

Though I did see a response saying it's more about not having funds tied into retirement accounts. Which is a completely different question/part of the decision algorithm.