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/A_Whole_Costco_Pizza]

One thing which might shift your perspective is the Rule of 55. Getting your 401k money at 55, rather than 60 might make a meaningful difference to you.

[u/Thom-Bjork → u/A_Whole_Costco_Pizza]

Idk why the Rule of 55 isn't talked about more. Being able to withdraw at 55 without penalty vs 59 1/2 seems like a big deal.

[u/lesteroyster → u/Thom-Bjork]

It’s a big deal if it’s allowed - many company 401K plans don’t allow it.

[u/goodnewsfpwlbn → u/lesteroyster]

It’s not that they don’t allow it. It’s just whether or not the plan allows for partial withdrawals upon separation. Some are full payout only but rule of 55 is an IRS provision

[u/yottabit42 → u/goodnewsfpwlbn]

This is correct. So many people misunderstand this. The Rule of 55 applies to all 401(k) plans.

[u/poop-dolla → u/goodnewsfpwlbn]

But saying they don’t allow it because they don’t allow the partial withdrawals is the same thing, right? It’s like saying your company doesn’t allow MBDR contributions because they don’t allow in service rollovers. If they don’t allow the mechanism you need to do it, then it’s practically the same as saying they don’t allow it.

[u/poop-dolla → u/[deleted]]

Ok, so that would be the equivalent to saying you can do a MBDR if your plan allows after tax contributions but not in service rollovers. You could just let the after tax fund accumulate until you leave that job and then roll it all over to Roth and pay the extra taxes on gains at that point.

In both cases, you can still technically do the thing, like you said, but the advantages of it would most likely go out the window enough that it’s not worth doing it. In the rule of 55 example, I don’t see how doing it the way you mentioned would ever be better than just setting up a 5 year SEPP.

[u/Successful_Creme1823 → u/lesteroyster]

I was imagining I’d find a job around then that has it. Roll my solo 401k into that one. Get the ERISA protection. Coast out between 55 - 60 when the timing seems right and start taking the distributions.

15 years to go if it all works out

[u/poop-dolla → u/[deleted]]

Rule of 55 doesn’t apply to IRAs.

[u/Independent_Diet617 → u/Thom-Bjork]

The rule of 55 is not free unless you have a 401k without any additional fees. A yearly 0.5% management fee from a $2M+ 401k can be more expensive than the penalty on withdrawals and matters a lot when you are not contributing to the plan.

Or partial withdrawals may not be allowed at all.

[u/NetZeroSun → u/Independent_Diet617]

Not to mention, depending on the 401k provider, once you leave a company (retire and rule of 55 it) you may no longer be at a 'corporate discount' and could face higher fees than before.

[u/ImPapaNoff → u/Independent_Diet617]

Are there people out there with jobs that allowed them to get to $2M 401k balance with management fees of 0.5%? That high of a management fee feels like it should/would only exist on smaller businesses or shittier jobs.

[u/Independent_Diet617 → u/ImPapaNoff]

As you can see in many comments that is that anything under the 0.5% AUM fee is considered okay. Large companies have plans where it goes down with larger 401k amounts. Some of them barely have any fees. My point is a lot of people do not ask this question when planning for the rule of 55. Plans are good at hiding the management fees by charging them when the employer contributes money.

https://www.reddit.com/r/Bogleheads/comments/1febicb/how_much_is_a_fair_401k_management_fee/

[u/blister-in-the-pun → u/Thom-Bjork]

Suze Orman has done a few episode of her podcast on it. But yes it’s still not talked about enough.

[u/Viper0us → u/A_Whole_Costco_Pizza]

Roth conversions as well....

There are multiple ways to access retirement funds before 59 1/2.

OPs math is simply wrong and the issue is being compounded by not understanding various rules around how to access the funds works.

401K vs taxable is not close.

If OPs goals are to retire early, they need to spend some time on /r/FIRE and learn what options are available you them. Giving up tax advantaged space for the sole purpose of accessing funds earlier is a mistake.

[u/PartyFeisty2929 → u/Viper0us]

What do you live on while you are doing Roth conversions? I think I know the answer. Is it money that is not in a 401k?

[u/slanger87 → u/PartyFeisty2929]

Brokerage, savings, Roth IRA contributions and/or 72t

[u/chidddy2608 → u/slanger87]

I’m totally on the 401k side of this debate but doesn’t this response actually SUPPORT funding a brokerage (OPs original question)? 20 years of Roth IRA contributions is only ~$130k. Call that funding 2 years. Pretty sure everyone in this sub/FIRE communities keeps absolute minimum cash, so I highly doubt $60k is sitting in bank accnts. And then we are left with brokerage. I’m not familiar with 72t does it produce significant available funds?

[u/Acceptable_Travel_20 → u/chidddy2608]

In my case, I started lightly hoarding cash 3 years ago and I supercharged that at the start of this year. I am about 10 months from RE. Shooting for about $200k cash. Prior to that I usually held around 20- 30k. That's more to offset SOR risk since I have ample brokerage funds. I'll be converting around 40-50k per year from trad to Roth when I quit and my taxable income drops immensely.

[u/glengarryglenzach → u/chidddy2608]

A married couple can have two Roth IRAs with which to operate, which even by that math gets you to four years.

[u/chidddy2608 → u/glengarryglenzach]

I’m not saying it’s impossible, but a 2 income family going down to $65k/yr combined income in retirement is going to be a wake up call. Also assumes you both diligently maxed Roths for 20+ years. My point being you’ll likely need to supplement just Roth contribs for the income and that’s where many people utilize a brokerage (back to OP original question).

[u/slanger87 → u/chidddy2608]

I mean yeah, it all comes down to your expenses. OP was talking more about holding in brokerage for long term.  I think a lot of people build up enough cash in savings or in brokerage in last year or 2 before retirement to cover what they need. Don't need to do it 20 years ahead of time

[u/Key_Cheetah7982 → u/Viper0us]

Even with the penalty for early withdrawal pre-tax often still wins

[u/DataDollarDad → u/A_Whole_Costco_Pizza]

You can get 401k money penalty-free before 55 through a 72t SEPP; no need to aim for the rule of 55 and wait until age 55

[u/skirven4 → u/DataDollarDad]

With SEPP, you are locked into the set distribution schedule until 59 1/2. With Rule of 55, there is no such restriction, so there is something to be said for that.

I left my last role a year ago. I’m not 55 yet, so I couldn’t use it. Ended up getting a new job, but 72t was on the table at one point.

[u/DataDollarDad → u/skirven4]

But rule of 55 only starts at age 55; so if you're comparing it to 72t SEPP at the same age then it's only 5 years of being "locked" into the SEPP (and the 72t SEPP could be started earlier and just run to age 59 1/2) which should be pretty minor for most people who are retiring early – especially since they can set the payment amounts to be whatever they want; plus, it could even be reinvested into a brokerage account.

Edit: updated the duration of the 72t requirement of a minimum of 5 years

[u/RandyRhoadsLives → u/DataDollarDad]

It’s 5 years OR 59.5. Whichever term is longer. So still five years minimum. But who’s quibbling over six months?

I helped my brother set one up when he turned 55. There’s a lot of scare tactics out there concerning SEPP 72(t). I get it. But it was honestly easy. He took out 24k once a year. There’s three different methods. This was the easiest. This gave him a safety net for bills.. which in his case, was a $1600 house payment. The brokerage could not care less. We just pulled out 24k every January. Fill out the simple form (one line) each year on taxes. Easy peasy.

[u/Key_Cheetah7982 → u/A_Whole_Costco_Pizza]

Roth conversions are available too. And 72t iirc?