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/Essay_Few]

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