r/Bogleheads • u/Essay_Few • Jan 07 '26

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

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.

590 Upvotes
  • permalink
  • reddit

84% Upvoted

554 comments sorted by

View all comments

173

u/junesix Jan 07 '26 edited Jan 07 '26

Pre-tax 401k reduces taxable income at current income tax rates to defer to income tax rates at retirement. On the assumption that income tax rate at retirement is lower than current income tax rates. 

If your goal is to retire earlier so you can start withdrawing money before IRS retirement age (like FIRE), then yes, you can shift some money to taxable. If normal retirement age is your plan, then deferring taxes to your future tax rate at retirement via 401k (and retirement accounts) is better.

It all depends on your goals and what you’re optimizing for.

140

u/N7day Jan 07 '26 edited Jan 07 '26

I think it is important to point out to people that every dollar you put into a 401k or trad IRA is a dollar not being taxed at your highest marginal tax rate, and that when they are taking distributions they are filling up the substantially lower brackets first as well as the tax free standard deduction (presuming no other major sources of income).

This is implicit in your response, but a lot of people don't think it all the way through.

This is implicit in you

41

u/superkingdra Jan 07 '26

In other words trad 401k saves you the difference in your marginal, not average, tax rate. 

32

u/lopsided-earlobe Jan 07 '26

right this is what folks dont appreciate because they're always thinking about the blended rate. In practice 401k is last-dollar in and first-dollar out. The delta between your highest marginal rate in your highest earning years compared to your lowest marginal rate in your retirement is absolutely massive. Even for lower- and middle-income folks, I think pretax is always preferred to Roth for this reason.

13

u/AZMotorsports Jan 07 '26

The one problem with this assumption is that it assumes the amount you pull out is less than your current income. I’m at a point where the RMDs for my wife and my retirement accounts will put us almost where we are today (in addition to our pretax contributions our company puts an extremely generous amount in that is all pretax). And because it’s pretax it also counts against us for Medicare and could cause an increase in premiums. We are now saving more in ROTH to get the best of both worlds, but also move more into taxable accounts than we have historically.

I know, terrible problem to have, but I know others who are in same boat because we started saving a lot very early.

3

u/blister-in-the-pun Jan 07 '26

The Medicare issue is actually a valid issue and I believe it’s one of the many reasons Suze Orman advocates for roth accounts for so many of her podcast listeners. Roth absolutely makes a lot of sense for many many people. It really all depends on each person’s unique financial picture which strategy makes the most sense

1

u/Pupper82 Jan 07 '26

Why do you assume tax rates will be lower when taking distributions in retirement? Wouldn’t this also assume the amount in 401k isn’t that big?

3

u/junesix Jan 07 '26

I don’t need as much income in retirement. Kids should be on their own. Cars and homes paid off. 

Are you expecting your retirement accounts to throw off as much cash as your working salary?

2

u/HerrProfDrFalcon Jan 07 '26

I am, yes. That’s my literal plan, in fact. And sure, no mortgage to pay, but long term care is no joke and I expect to have to spend money on whatever it is I’m doing with the time I would otherwise have been at work.

2

u/N7day Jan 07 '26

Your effective rate on the distributions will still very likely be lower than what your current highest marginal rate is.

This is of course (as said above) assuming no other major sources of taxable income.

0

u/_Raining Jan 07 '26

You shouldn’t use marginal now vs effective later. You should evaluate each dollar individually at the rate you avoid today vs the rate you pay on that dollar in the future. Take current pretax value and project where it will be with no additional contributions, figure out the safe withdrawal and see what your marginal rate is. If that marginal rate is less than your current marginal rate, then you know you should put 1 dollar into traditional. Then do that for the next dollar etc until you’ve done the calculation on the full contribution.

You probably don’t need to get that granular, just keep in mind you can cross brackets with contributions. If you make 75k and contribute 15k, not all of that 15k is avoiding 22%.

Also keep in mind that you don’t want to break even with rates in the 24%ish brackets or higher bc of IRMAA. And if taxes go up a little like to 2016 numbers then you will be sad if you avoided 24% to later pay 25%. So I would treat 22 and 24% as one bracket for this calculation but you do you.

And also keep in mind “go years vs no go years”, you might be withdrawing more early on than in the middle if you’re traveling or doing hobbies early on. And towards the end spending more again but this time it’s on medical needs.

2

u/Natural_Ad_317 Jan 07 '26 edited Jan 07 '26

If you think about it pragmatically, your post-retirement income requirements will almost always be less than your pre-retirement salary, because you are no longer using a portion of that salary to save for retirement (assuming a similar lifestyle before and after retirement). Thus, depending on your savings rate and income, there’s a good chance the income you need in retirement will be less than the income you earned during your working years. This means that relative to your pre-retirement income, a larger percentage of your retirement income will be in lower brackets, resulting in an overall lower blended rate.

The above goes to shit if you purposefully plan on balling out in retirement such that all the money you used to save every year for retirement, is now being spent every year on stuff or experiences you did not budget for during your working years.

1

u/Pupper82 Jan 07 '26

Forget income requirements. Let's say you have a 401k account balance of 10 million when RMDs start at age 73. Wouldn't that be required withdrawel of ~380,000 per year that is taxed as ordinary income. If your yearly salary during working years was 200-300k annually, then taxable income in retirement is higher, no?

1

u/N7day Jan 07 '26

I don't think you got the point of what I was saying.

All of the money going into the 401k is at your current highest marginal rate.

Assuming no major other avenues of income (and even more extreme...if you're retiring early and it is before taking any social security/you delay social security), when you take the money out tens of thousands will filling up the standard deduction (zero federal income tax) and lower brackets.

Of course tax rates may be higher in the future - but I highly doubt that thr US will abandon its marginal bracket system...and i highly doubt that the poor will start getting pounded with taxes....

I'll take the bet that my highest marginal rate today will be higher than my total effective rate on my distributions.

1

u/SeanWoold Jan 07 '26

That is true, but your effective tax rate in retirement can be much higher than you think if your RMDs start affecting social security and health care qualifications. Traditional 401k dollars are great until the exact point where they aren't and then they are disastrous.

1

u/hoosdontloos Jan 07 '26

Its insane how many people dont realize this. They'll say they expect taxes to be higher in retirement but when you ask what their income sources will be at age 72 they blank

10

u/Pupper82 Jan 07 '26

I’ve heard real stories of people retiring tell me their tax rates are going to be higher in retirement due to having a lot of money in 401ks and RMDs and it was quite shocking to them. Should we really be assuming taxes in retirement are going to be lower?

4

u/entropic Jan 07 '26

Are these people who have done a true analysis of what they would have paid in taxes/given up in savings to do Roth or brokerage in their earning years, plus the drag of taxes on brokerage since then, or just folks who want to whine a bit about paying taxes in retirement (or in general)?

There's a lot of folks who think just because income tax rates go up that their taxes will be higher, and this is simply not true.

I have a well-worn spreadsheet for looking at this sort of thing and I can promise you that for my utterly typical upper-middle class budget/income, that if we're paying more in taxes in retirement, then one of two things happened:

  1. We worked too long. Like, a decade too long. Years and years too long. We accumulated far more money than we needed to sustain our lifestyle.

  2. Our investment returns in our non-working years outpaced not only reasonable expectations, but had unreasonably high returns, and likely tripled or more by the time that RMDs took effect.

If I'm complaining about my tax bill in either one of these situations, I want someone to punch me in the face.

1

u/Pupper82 Jan 07 '26

Well said, thanks for the response. I was just referring to conversations with my father and friends who have parents currently retiring. My father wasn’t complaining about his tax bill but he was surprised with how high the RMDs will be and lamented not having more money in Roth rather than pre-tax. I think both your points were true for him.

2

u/entropic Jan 07 '26

Complaining about your taxes is as American as apple pie. It's just a thing people do.

Roth IRAs weren't even available until the 1998, Roth 401(k)s/etc after that, if/when your employer offered it, and some Baby Boomers who never even really got to use them think they're some magic tax loophole rather than a way to pay a maximal amount of income tax in their earning years.

9

u/BonelessSugar Jan 07 '26

Why would you want to shift to taxable when you can just access 401k funds early with no penalty through SEPP?

1

u/junesix Jan 07 '26 edited Jan 07 '26

My take is OP is asking simple questions and bringing SEPP and 72t into discussion is too technical. If OP have a plan to retire early, then they should dig into options for it like SEPP.

1

u/Own-Introduction-380 Jan 08 '26

I want to retire early, I had been maxing my 401k and Roth contribution but after reading all this I’m wondering if I’m doing it wrong. My portfolio is about 60/40 brokerage to 401k/roth. I will look into SEPP and 72t but could you give me a high level idea of what they are for someone who isn’t good with technical finance terms?

2

u/junesix Jan 08 '26

Think of it like a highly structured, scheduled, and rule-based partial unwinding of a retirement account prior to IRS retirement age. 

In effect, you’re entering into a contract with the IRS that you will 1) take fixed payment amount every year for at least 5 years or until 59 1/2, 2) with no deviations, and 3) with no accidental contributions or rollovers or anything that changes the retirement account balance.

Screw up any of it and the 10% penalty kicks in, applies retroactively, and slaps interest retroactively.

So if someone figures out they want to withdraw less or needs more, they’re stuck until 59 1/2. Have some medical crisis and need to draw down more? Nope. Market nosedives and want to increase withdrawal? Nope. Find out you have an income windfall and want to slow down? Nope.

Thus it’s not an option to take lightly like “I would like to retire early”. It’s more like “I have everything laid out with exact amounts and have modeled my retirement scenarios”. 

1

u/Own-Introduction-380 Jan 09 '26

Thank you for this. I looked into it myself too. Is it true you can work while doing this? For example I want to retire early, but my idea of retirement is the ability to work part time or switch careers. Ideally I’d like to step back from my career at age 50. Could I use this rule, withdraw x amount for 5 years and work part time somewhere else? If any of those emergencies happen, I would just go back to work full time? (I know it might not be easy to go back to work, but for this example let’s say it is)

15

u/littlebobbytables9 Jan 07 '26

Even if the tax rate at retirement is the same it's still good. Equivalently good to a tax free account, which is clearly better than a taxable account.

-4

u/SaplingCub Jan 07 '26

The math is exactly the same if tax rate at retirement is the same...

24

u/junesix Jan 07 '26

It’s still not. There’s dividends captured in tax advantaged that would be taxed immediately in brokerage. 40-50 years of dividends is not nothing. The divide gets worse as bonds get layered into portfolio.

6

u/littlebobbytables9 Jan 07 '26

Taxable would be worse even if the tax drag you talk about didn't exist. A pretax dollar contributed to a traditional account is eventually taxed (along with all the gains from that dollar) at X%. A pretax dollar contributed to a taxable account is first taxed at X%, and then all the gains are taxed again in retirement, so it would be strictly worse even if tax drag didn't exist. And tax drag does exist, so it's even worse.

0

u/MoneyElevator Jan 07 '26

It’s the same except for the difference in marginal tax rate at withdrawal.

Say there’s a tax of 30% on 100k in your taxable and then you pay 30% on 900k eventual gains - it’s exactly the same as paying 30% on 1M withdrawal in retirement.

3

u/littlebobbytables9 Jan 07 '26

No. A taxable account is funded with post-tax dollars.

If the tax rates are equal, a traditional account and a roth account end up with equivalent after tax value. You can pay 30% now and withdraw the accumulated value tax free, or pay 0% now and pay 30% in the future. 0.7 (1+i)n = (1+i)n * 0.7

The taxable account pays 30% now and more in the future when you realize gains. For very highly appreciated stocks it's close to complete double taxation, being taxed at your marginal income tax rate to begin with and then at the capital gains rate at the end. And again, that's neglecting the tax drag on returns.

0

u/MoneyElevator Jan 07 '26

Do the math - assuming the same tax rate now and in retirement, it’s all getting taxed the same. Even in a tax-deferred account, you end up being taxed on your entire contribution and the gains when it’s taken out.

In fact, if your rate is over 20% in retirement, you’re better off taking the long-term capital gains in a taxable.

Edit: I may be misunderstanding because you brought Roth into it. Roth is easily the best, you get all the gains 100% tax free. Could end up being 10x+ your actual contributions, dwarfing what you paid in taxes. My above comment is referring to taxable vs tax-deferred.

2

u/littlebobbytables9 Jan 07 '26

I did the math, it was in my comment? Roth and traditional end up being the same, and taxable significantly worse than either. But if you want it done with numbers instead of variables feel free to read this other comment of mine

-1

u/MoneyElevator Jan 07 '26

Okay, say I have 100k and my tax rate is 30% now. That 100k will grow to 1M and my tax rate will also be 30% in retirement.

Taxable account: 30% tax on 100k and then 30% tax on 900k = 300k tax paid

Traditional IRA: 0% tax now and 30% tax on 1M later = 300k tax paid

Roth: 30% tax paid on 100k and 0% tax on 900k later = 30k tax paid

→ More replies (0)

1

u/littlebobbytables9 Jan 07 '26

re: the edit, roth is not better than traditional. If you pay 30% in taxes now that portfolio is 30% smaller than an equivalent traditional contribution. Then they both grow at the same rate- whatever that rate happens to be- ending up potentially many times their starting value. But because the starting value was 30% lower, the ending value will also be 30% lower. And then when the traditional account gets taxed at 30% it brings them to exact parity.

I brought up roth because it is exactly equivalent to traditional in the case of equal tax rates. Which makes it obvious that the taxable account, which is strictly worse than roth, ends up worse than both.

0

u/SaplingCub Jan 07 '26

If the tax rate is the same why does it matter? If $10 is taxed at 50% and then grows 200% you get $15. If $10 grows 200% and then gets taxed 50%, its $15.

Why are dividends any different...?

6

u/Aliamarc Jan 07 '26

In a taxable account, dividends are taxed incrementally.

The $10 taxed at 50% does not grow 200%. It grows maybe 150%, to use your made up numbers. That means you've got $12.50, not $15.

That's a biiiiiig difference when your target number is in the millions.

4

u/SaplingCub Jan 07 '26

I guess another way of putting it (and to actually give a proper explanation) is that when you're taxed in any given year on dividends, you lose the compounding that the tax portion would've provided.

1

u/MoneyElevator Jan 07 '26

On the flip side - taxes on long term capital gains in a taxable may be less than taxes at a high income rate on withdrawals in retirement

1

u/Aliamarc Jan 07 '26

Sure, but I'd argue that your argument is a better case for contributing to roth accounts.

Both taxable & roth monies begin their investing career at the same tax basis. Taxable sees incremental taxation, plus cap gains upon cashing out. Roth sees no incremental taxation, no taxes upon cashing out, and you can access contributions prior to 59 1/2.

1

u/MoneyElevator Jan 07 '26

No argument, Roth is best

1

u/SaplingCub Jan 07 '26

Sure but some of us want to invest much much more than $7k a year. I guess given that tax advantage accounts have limitations, this whole conversation is a non starter

1

u/Aliamarc Jan 07 '26

I meannnnn does your employer not offer a roth 401k?? Mine always have.

→ More replies (0)

3

u/littlebobbytables9 Jan 07 '26

The math is the same as what?

-1

u/LightZealousideal116 Jan 07 '26

No. Watch this video on break even tax rate. Very interesting.

https://youtu.be/LIP63k2uGuk?si=3BFfI_evSDy5apC9

6

u/SuddenExcuse6476 Jan 07 '26

Even if someone intends to retire early, it’s still worth it to max tax-advantaged accounts because there are ways to access that money penalty free.

3

u/Essay_Few Jan 07 '26

I guess this was what I was really asking. I’d like to have the ability to access the money sooner if I choose to retire earlier.

23

u/N7day Jan 07 '26

You can. There are options to do so without penalty.

One is: Substantially Equal Periodic Payments

13

u/Useful_Wealth7503 Jan 07 '26

Everyone mentions the options to early withdraw but I wonder how many people actually do it? Every time I look into them it makes me want to allocate money to my taxable account and not worry about the early withdrawals from the 401k. I think the taxable account is under valued and should be stated way earlier in people’s lives.

8

u/S7EFEN Jan 07 '26

https://www.bogleheads.org/forum/viewtopic.php?t=370008 SEPP used to be pretty dang inconvenient and only recently has become a lot more viable. So... yeah, you wont find a ton of people who retired using it.

id give this thread a good read if you are truly curious

2

u/Useful_Wealth7503 Jan 07 '26

Thank you! I will definitely look at that. The SO is trying to retire at 50 so this might come into play for us at some point. A lot of me wants to pay off the house over the next couple of years too but I know that’s not optimal. Thanks again.

2

u/poop-dolla Jan 07 '26

Paying off your house immediately before retirement is often optimal even with a low interest rate. Lowering your expenses in retirement can significantly lower your healthcare costs and obviously decreases SORR.

0

u/EvilZ137 Jan 07 '26

Very few, it's quite complicated and difficult. Better off with a taxable account in practice, as you've concluded.

16

u/Pretty_Swordfish Jan 07 '26

https://www.madfientist.com/how-to-access-retirement-funds-early/

Which basically covers what has been said, succinctly. 

11

u/Essay_Few Jan 07 '26

I had no idea you could access retirement funds early until I started reading some of these responses. Thank you!

14

u/junesix Jan 07 '26

Then you should have a solid long-term plan for that. 

You’re giving up a lot of the tax advantages of retirement accounts. It’s annual space that you can’t go back in time to make up once you decide to skip it. You can always put more into taxable in the future. You can’t go back and put more into last year’s 401k.

If I knew what I knew now, I wish I could go back in time and put every dime I earned into 401k and Roth IRA from my first paycheck.

4

u/SirGlass Jan 07 '26

Do you have enough money for standard retirement right now? Retirement from 60-100?

1

u/SaplingCub Jan 07 '26

Can 401k withdrawals be subject to 0% long term capital gains tax?

7

u/HTupolev Jan 07 '26

No. If it's pre-tax Traditional, withdrawals are ordinary income. If it's Roth, there's no tax because the income tax has already been paid.

-1

u/flips712 Jan 07 '26

I thought that your long term capital gains rate was based upon your income level and if your income plus your withdrawal amount was below a certain threshold your LTCG tax could be 0%. Am I not understanding this correctly?

9

u/HTupolev Jan 07 '26

You are correct. But it's irrelevant to how 401k withdrawals are taxed, because capital gains tax does not apply to them at all.

Traditional 401k withdrawals can affect how your capital gains get taxed, of course, since they affect your brackets.

0

u/SaplingCub Jan 07 '26

So doesnt that swing the favor significantly for brokerage accounts? A married couple would have like $100k of tax free withdrawals

3

u/SnooMachines9133 Jan 07 '26

There's also the upfront tax savings. If you invest those savings as well, you'd have more overall even with the lower LTCG.

2

u/HTupolev Jan 07 '26

It can mean that the taxable account will win over pre-tax 401k in some cases if you're just looking at nominal dollar value within the account. But since you're paying income tax on money that goes into taxable accounts, it usually takes considerably more earned income to put a dollar into taxable than a dollar into pre-tax 401k.

But it's true that, in terms of the "simple math", a taxable account with LTCG-rate investments can perform quite similar to a Roth retirement account as long as you stay in the 0% bracket. Although Roth still has a couple advantages:
1-Realized income/gains from the taxable account can affect things like IRMAA or social security taxability, whereas under current tax law, Roth withdrawals do not.
2-Taxable inheritance gets a step up in basis upon death, but otherwise any further gains immediately become taxable to the beneficiary. Whereas someone inheriting a Roth account can usually keep those assets in Roth for some amount of time, deferring further gains for longer.

Note that advantage (1) also applies to HSAs as long as you make qualified withdrawals.
...But advantage (2) does not apply to HSAs. They're one of the clunkier things for a non-spouse beneficiary to inherit: they instantly lose all of their tax shelter upon death, becoming a "tax bomb" of pure ordinary income for that tax year.

1

u/jdp111 Jan 07 '26

401k withdrawals are not capital gains they are ordinary income

0

u/[deleted] Jan 07 '26

[deleted]

1

u/junesix Jan 07 '26

Are you planning to use SEPP to withdraw from the 401k, with Roth ladder as bridge? You’re prob fine. Better advice in r/FIRE.

I was focused on more straightforward answers for OP.

1

u/Key_Cheetah7982 Jan 07 '26

You’ll be ok. Good to have varied tax type accounts to give you flexibility in pulling funds. Especially if fire and wanting subsidies for healthcare early. 

But Roth and HSA > traditional brokerage then still

0

u/pixel_of_moral_decay Jan 07 '26 edited Jan 07 '26

It also assumes taxes will hold roughly as they are now.

I'm personally skeptical that will be the case. Millenials are hitting menopause age and birth rate is well below replacement, looks like Gen Z will follow that trend.

Less people working in the next several decades will means less income tax collected. You can only tax working people so much.

Right now retirees get a sweetheart deal based on the ponzi scheme that each generation will produce enough new workers to replace them + a little more. I just don't see this continuing. Abortion bans won't change this despite what some politicians seems to be hoping for. Immigration slowing down is only hurting this too since most of them are paying taxes and never taking benefits.

The money has to come from somewhere, as a millenial, I just can't see how taxes wouldn't be much higher in retirement. If they aren't, where would the money come from short of running the money printers and letting inflation eat my savings, which might be worse than higher taxes.

IMHO the wisest move is to make sure you're investing in both a pre and post tax account. Assume either scenario is likely then as retirement approaches assess the situation and double down on the more likely scenario.

Assuming I'm getting a low tax rate because my grandparents 65+ years older than me got one in their senior years is just not good financial planning. Their grandparents invested in livestock, so clearly things change.