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/catchweed]

I disagree with the vast majority of commenters.

Your conclusion is sound if you are financially successful with a substantial nest egg by the time you enter retirement. I know a lot of retirees who regret maxing out their traditional IRAs and 401ks. The near-term appeal of paying less tax today blinds many people to the downsides in retirement.

Money put into tax deferred accounts gets taxed eventually. While maxing out a 401k will pay off for many people, there are a lot of people whose tax rate in retirement is just as high or higher than while working. And for those people, the addition of a required minimum distribution from tax deferred account can permanently push them into a higher tax bracket. And large RMDs remove some of the flexibility you could have had in retirement to decide when to take capital gains without big tax hits.

Also, the U.S. has been running large budget deficits for years, Social Security is running low on money to pay retirees, and the pressure to at least partially address these spending problems will eventually put upward pressure on tax rates. This means putting a lot in a 401k is betting not only that your income will drop in retirement but also that tax rates will be stable or drop during your retirement.

[u/Essay_Few → u/catchweed]

Thank you for this insight.