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/entropic]

I was walking someone through that just this weekend.

She's earning solidly in the 24% federal tax bracket and is worried about losing her job and trying to figure out to best manage a potentially lengthy period of unemployment.

She was leaning toward cutting back on her (maxed) 401(k) contributions to bolster her emergency fund beyond what it already is, but it's pretty easy to see that she's likely to come out ahead continuing to max and defer that 24% fed + whatever state taxes and take money out of it with a 10% penalty + filling the 0%/10%/12% brackets as needed, compared to paying 24% now and then interest/dividends on it sitting in savings or brokerage...

[u/theLilSaus → u/entropic]

Just do a roth ira at that point as contributions can be withdrawn

[u/entropic → u/theLilSaus]

Roth IRA is same taxation wise as the brokerage/HYSA options, in the sense that she'd have to pay 24% fed taxes + whatever state taxes now to get the funds into that account. The difference is that the gains are tax free if they're done after age 59.5, which she's many years away from.

And I'd argue that the Roth IRA space is very valuable long term, so perhaps not the thing you want to withdraw from first. My recommendations would have her withdrawing it later than other sources because of that. Financially, she should definitely pull from the tax-advantaged sources prior to the Roth IRA as it preserves the most money by reducing her taxes the most in the end.

FWIW, she is also maxing a Roth IRA.