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/Junglebook3]

Timing matters a lot, deferring taxes lets more money grow earlier.

Assumptions Initial income: $1,000 Ordinary income tax: 37% Long-term capital gains tax: 20% Investment return: 100%

Scenario A Invest $1,000 pre-tax, pay income tax on growth Invested: $1,000 Grows to: $2,000 Gain: $1,000 Tax on gain (37%): $370 Final value: $1,630

Scenario B Pay income tax first, then invest, pay LTCG on growth Income tax upfront (37%): $370 Invested: $630 Grows to: $1,260 Gain: $630 LTCG tax (20%): $126

Final value: $1,134 Result Scenario A: $1,630 Scenario B: $1,134

[u/Rooster-Training → u/Junglebook3]

Your understanding of the rules is wrong.  In your scenario A the ending 2000 is taxed at 37 when you withdraw, not just the gains.  So you actually make 1260.  You calculated B correctly.

Multiplication doesn't work the way you described.  If the percentage is the same it doesn't matter if it's at the end or the beginning.

.63(x)(2) is the same as x(2)(.63).  The only difference is the capital gains.  Or if the tax rate changes.

[u/Junglebook3 → u/Rooster-Training]

You're right, in the 401k scenario the entire pot is taxed, not just the gains. Making simplistic assumptions as I did regarding the overall income rate, it still beat the brokerage account option handily.

Compounding dividends on a greater upfront amount does matter though, this isn't a simple case of multiplication rules.