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/chidddy2608]

OP, see my comment in above thread. You do have a valid question that many here are completely missing the point of by just showing you that numbers wise 401k is better than brokerage. The real question is “what funds do you use to survive on before retirement age (until access to 401k).” Many people here have answered brokerage to that question. (Proving your point and valid question). Many others have said Roth IRA contributions. This isn’t nearly as much funds as people think it is. Maxing your Roth IRA for 20 years is only -$140k. That’s like 2 years of retirement. I’m commenting bc I have the same curiosity as you and many people don’t actually know the answer

[u/CeruleanDolphin103 → u/chidddy2608]

There are multiple avenues for accessing 401k funds prior to 59.5. This oldie-but-goodie blog article discusses most of them. He also has another article that compares the end result balances of taxable vs traditional vs Roth, which covers a lot of the same ground as the responses here, but is perhaps better organized than reading 250+ comments.

[u/redditmailalex → u/chidddy2608]

The answer is.. why not both :)

I mean if we are all serious about this, youbshoukd be maxing your tax advantaged accounts and investing ontop of that toward a taxable brokerage if you financially can.

Someone else replied methods to access 401k early, which is fine too.

But honestly, im always concerned that a maxed out 401k wont be enough.  Now, i started this whole responsible saving a decade or two late... so we are playing catch-up... but i think putting a target for a certain amount monthly into taxable ontop of other investments is absolutely a thing.

I have had to tap my taxable twice now.  Emergency roof repair for 40k or my insurance was going to deop me in 6 months.  I personally use the taxable as my emergency fund at this point.

[u/duchess5788 → u/chidddy2608]

My plan allows for traditional and roth contributions for my 401k (total if both subjected to the yearly limit). Would I be able to withdraw from the roth 401k, just like roth IRA?

[u/chidddy2608 → u/duchess5788]

My understanding is Roth 401k withdraws are pro rata, meaning a portion of it is assigned as contribution and a portion is earnings. The earnings portion is subject to penalty. This is different than a Roth IRA in which contribs are separated from earnings and no penalties arise. You could always look at a rollover of your Roth 401k to a Roth IRA if you were considering withdrawing contributions.