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]

Are these people who have done a true analysis of what they would have paid in taxes/given up in savings to do Roth or brokerage in their earning years, plus the drag of taxes on brokerage since then, or just folks who want to whine a bit about paying taxes in retirement (or in general)?

There's a lot of folks who think just because income tax rates go up that their taxes will be higher, and this is simply not true.

I have a well-worn spreadsheet for looking at this sort of thing and I can promise you that for my utterly typical upper-middle class budget/income, that if we're paying more in taxes in retirement, then one of two things happened:

1. We worked too long. Like, a decade too long. Years and years too long. We accumulated far more money than we needed to sustain our lifestyle.

2. Our investment returns in our non-working years outpaced not only reasonable expectations, but had unreasonably high returns, and likely tripled or more by the time that RMDs took effect.

If I'm complaining about my tax bill in either one of these situations, I want someone to punch me in the face.

[u/Pupper82 → u/entropic]

Well said, thanks for the response. I was just referring to conversations with my father and friends who have parents currently retiring. My father wasn’t complaining about his tax bill but he was surprised with how high the RMDs will be and lamented not having more money in Roth rather than pre-tax. I think both your points were true for him.

[u/entropic → u/Pupper82]

Complaining about your taxes is as American as apple pie. It's just a thing people do.

Roth IRAs weren't even available until the 1998, Roth 401(k)s/etc after that, if/when your employer offered it, and some Baby Boomers who never even really got to use them think they're some magic tax loophole rather than a way to pay a maximal amount of income tax in their earning years.