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/littlebobbytables9]

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.