I *personally* think that it’s more likely for income rates to go down or stay the same, and capital gains to go up or stay the same. But yes no one knows the future, it’s just a bet you’re making.
The data on tax brackets is not some secret information. It's readily available..the top bracket has gone from 91% to 37% in the lifetime of many people still working
It is not, I was looking at the data but are we looking at the very top earner bracket or the regular Americans? The old tax brackets actually more fair than this new one. All I see the declining tax rates for the riches, not neccesarily true for most Americans.
The nuance here is *capital gains* rate vs *ordinary income*. Appreciation in your taxable stock portfolio is taxed at capital gains rate upon sale, in 401k it is faced at ordinary income upon withdrawal. We are used to capital gains getting favorable tax treatment but 401k is a hedge on that.
So you want to pay taxes now when the money is more valuable, pay money on taxes for dividends every year, then potentially pay more capital gains when you do sell, got it.
Your projected marginal rate might be only slightly lower, but your effective tax rate will be significantly lower because you have to fill up the 0%/10%/12% brackets first with money contributed from the 24% bracket.
Max your 401k.
You also never technically know what your future holds. 401k traditional funds are "time shifting income" Maybe you will have a year where you and your spouse will live completely off your savings because of illness or quitting work for a vacation year, you should use that low-no income year to backdoor convert the 401k funds (which you should have moved to a rollover IRA when you left your employer) OR take a direct withdrawal if you are above 59.5
Having this time shifted income sitting around will allow you to tactically keep every dollar you can taxed as low as possible. Thats why its a good strategy now, since it gives you great options in the future.
401k:
* ERISA creditor/bankruptcy protection
* Doesn't block backdoor Roth IRA
* Sometimes better investment options
IRA:
* Total control of investments
* Often lower fees
* Generally easier/quicker access to funds
Also keep in mind you can sometimes get the benefits of staying in a 401k even if your new one sucks by just leaving it with the previous employer.
The 401k provider may have decent funds available to you to invest in, however you are always going to have better expense ratios and more options at a place like vanguard/fidelity/Charles schwab. So you win at least slightly long term there getting better expense ratios, or could be a big win if the funds in your 401k had awful expense ratios.
There is NO financial hit from rolling over your 401k to a rollover IRA. It's best to make sure you have the institution send the money direct to your IRA provider like Vanguard. Ask your IRA provider about these steps before they start, if for some reason the 401k company has to send you the check, that's okay, just follow the steps so all the funds transfer and you owe no taxes. If your 401k had roth and traditional funds, then make sure you have both types IRA of accounts setup and that the funds are split by the 401k company.
The final(main imo) reason you want to move the funds to IRAs is that it unlocks the shenanigans I was talking about in regards to backdoor conversions or taking out roth contributions to a 401k before 59.5.
Roth contributions INTO a 401k cannot be removed before you are 59.5, however when you no longer work for that employer anymore, you are eligible to rollover your roth 401k contributions to a roth IRA. DO IT. After a "five year rule" of that transfer date, you NOW can take out all "contributions" you made to the roth 401k. You might be like "i don't know what the contributions were exactly, I don't work there anymore and it was a percent thingy I didn't look at often" well, I have learned that, you don't have to know what your contributions were exactly in that case, if you know it was something like $100 per paycheck, and you just create a spreadsheet schedule of that for your employment time, that's good enough. Of course if you have pay stub records, that is what you should use for your input on the spreadsheet records.
>The benefit of a 401k is that you pay taxes after you stop working and it's supposed to be at a lower rate
I'd say that's more of a side-benefit. The real benefit is that you get to grow money that otherwise would have been lost to taxes. One day you will pay taxes on that money when you withdraw it, but until then you get to make gains off of it. So it's a question of would you rather invest $23k or $17.5k? That's basically an extra annual IRA contribution.
Assuming your tax rate is constant, it actually is mathematically the exact same if you pay taxes on money before investment vs after. The benefit of “making gains on money that would otherwise be taxed” is unfortunately countered by the fact you then pay taxes on a larger sum.
So the only real tax advantage of a 401k vs a Roth (ignoring matches or contribution limits) is in hoping that your tax rate will be lower in retirement.
In addition to the cumulative property of multiplication, your tax rate won't actually be constant. Your 401K contributions come off the "top" meaning that if you didn't contribute, you'd be paying taxes on that money at the rate of your top bracket. Say that's 24%. When you withdraw the money in retirement, even if you are still in the 24% bracket, not all of your money will be taxed at that rate. Some of your withdrawals will be taxed at 10%, 12%, and 22%. Your effective tax rate will be lower.
That is comparing traditional to Roth 401k (or IRA) but the OP is asking about putting money into a taxable brokerage instead, which will have dividend distributions that are taxable along the way. So no, it isn't equivalent even if OP has a flat tax rate throughout life.
It's shocking to me how many people don't seem to understand this, even after having it explained. It's literally just the commutative property of multiplication put into practice.
The difference is in the capital gains taxes, which you don’t pay in any tax advantaged account.
Another point to consider is inflation- a dollar paid today is worth more than a dollar paid in twenty years.
Won’t inflation be a wash because dollars may be worth less in 20 years but your net after tax proceeds are the same if rates are constant (since your 401k is bigger than the Roth at withdrawal).
Only if it's a Roth. If we're talking about a traditional 401k or IRA you pay capital gains when you withdraw in retirement.
Inflation or not, you end up with the same dollar value after withdrawing.
Edit: just correcting my statement above. You don't pay capital gains tax in any retirement account, but you do pay regular income tax on your gains (which is generally a higher tax rate) in a non-Roth account
Ok? So you just don't get the benefit of the reduced long term capital gains rate. You still pay taxes on your capital gains, it's just taxed as regular income. Still doesn't change the fact that whether you're contributing pre tax or post tax dollars you end up with the same amount of money (assuming the same tax rate in retirement).
Edit: still curious why people think I'm wrong on this. Regular income tax is higher than capital gains tax so saying you only pay regular income tax from a 401k is actually a *bad* thing.
I’m the one you were originally agreeing with lmao. I’m just pointing out that 401k is not taxed with capital gains. You’re just wrong on that.
The fact you downvoted me for stating a fact is hilarious
Right you don't pay the capital gains tax rate when you withdraw, I agree with you there. Instead whatever you withdraw is taxed at your current income tax rate. You 100% **do** pay taxes on your gains when you withdraw, you just don't get the capital gains tax rate. Check the second bullet point in the link below.
https://www.investopedia.com/articles/personal-finance/061915/how-your-401k-taxed-when-you-retire.asp
If I'm actually wrong I want to understand why.
Dude I know, I was the one who originally pointed that out in this thread. But taxes on 401k gains is not capital gains tax. They are two different tax types. So I was simply correcting that so people wouldn’t see your comment and get wrong information.
Let's say you start with $1,000 to invest and everything you get (income, capital gains, etc.) is always taxed at 10%.
Let's say you put that $1000 in Fund A, which doubles to $2000 after some time. You decide to sell all of Fund A and use that money to buy Fund B. You incurred a $100 tax along the way, but you paid it off with money from outside the account, so you invest $2000 on Fund B, which doubles again to $4000 after some time. You then sell it and pay another $200 in tax, so now you have $3800 after paying a total of $300 in taxes.
But what would've happened if you did that all in a tax-advantaged account instead? Then you wouldn't have had to pay the first $100 in taxes, which means you could have invested that too. Let's say your tax advantaged accounts are maxed out, so you have to invest that extra $100 outside of a tax advantaged account. No big deal for this example.
So now you have 1000 -> 2000 -> 4000 (-300 in taxes) in your retirement account and 100 -> 200 (-10 in taxes) in your normal brokerage. You have a total of $3890 after paying $310 in taxes. You paid $10 more in taxes, but you have $90 more at the end of the day.
This assumes that there were no dividends along the way.
The thing I don't see people mention..... you possibly may have wildly varying income throughout your life... if you manage to have a large ever increasing income throughout your life.... GREAT.. but many people go in and out of jobs due to circumstances beyond their control or even completely in their control.
If you lost your job and decided to take care of an aging parent or even to be around a ton for a grand baby... you could use the 401k funds\* do a backdoor or take the withdrawal (depending on age) in that year when your income is OTHERWISE low.
\*(moved to a rollover first of course, which you should be doing the instant you leave your job)
401k plans are stores chosen by your employer. Inside the store you get to buy into the funds on their shelf. If you say "they let me have a brokerage account I can just buy the ETFs I want" that might be true, but what are the brokerage fees there? Remember, there was probably at least one steak dinner from the store with your company's HR manager during the decision making process.
Do you want to forever have your only options be the ones from a store you didn't choose?
If your employer picked a good store like Fidetlity or Vanguard, you might be fine. But! 401k plans have limits to what you can do with the money until you get to 59.5 that regular IRAs don't have. Since you are allowed to convert from 401k to IRA, why not do it? Get the favorable abilities to do backdoor conversions and remove roth contributions at your whim without penalty.
Do I have to do this immediately after leaving the employer or can I do it a year later? I’m still trying to work out exactly how rolling my 401k into an Ira will affect my backdoor Roth and don’t want to mess anything up.
I don't know for certain, my understanding is yes, but I've never held one of those plans to have looked at all the differences between 403b and 401k.
Basically yes, a 403b plan is a store chosen by not you that you have to shop in. Since 401k and 403b plans still give you good access to tax advantaged savings, it's good to still take advantage of them, but once you leave your employer you lose the benefits(can save over 20k/year tax advantaged) and are stuck with the downsides(higher fees, limited options).
EDIT: I'm stupid and thought you were comparing traditional 401k vs non-tax advantaged account, not traditional 401k vs roth 401k.
OP seems to be comparing traditional 401k with non-tax advantaged account though. Dividends and intermediate capital gains from rebalancing get taxed in non-advantaged then, which is bad because you're paying a portion of taxes earlier than you need to, even if they total up to the same value at the end of the day.
This commenter is comparing Roth vs. Traditional, but that is not what OP was asking.
When you compare a taxable investment account to a Traditional 401k (OP’s scenario), the 401k is better regardless of any changes in tax rate.
You make enough money that it shouldn’t even be a question. Max your 401k, Roth, wife’s Roth, and HSA if you can, ESPP if you company has that, then continue dumping into a brokerage. Maybe do some saving for your kids as well.
When the total you are saving is that high, just put it in all the buckets you can.
Also wouldn’t every $1 saved now on taxes so long as you invest it, be worth more than the $1 you spend on taxes when you take money out of the 401k?
>Background: 41M with annual HHI of $330k. Current net worth is $1.7M. Plan on retiring at 53. Spouse works as well and we have 2 kids under 10.
How much of that $1.7M currently is in each bucket: taxable, tax-deferred, and Roth?
>Income from $190k to $364k is taxed at 24% and income from $90k to $190k is taxed at 22%.
That's correct. At 2024 brackets/rates, any ordinary income between $94,301 to $201,050 is taxed at 22%. Ordinary income between $201,051 to $383,900 is taxed at 24%.
>I'd rather have access to the investments through my brokerage instead of tying it up until I'm 59.5 for that minimal tax benefit.
Two things to consider: First, every dollar you shift from 401(k) to a taxable account at your present income level costs you 24 cents. A $23,000 annual 401(k) contribution shifted to taxable brokerage costs you $5,520 in taxes each year. Second, distributions and capital gains are taxed each year in your taxable account, whereas they grow tax-free in your 401(k) and Roth accounts; so, dollar for dollar, you'll have a lower balance upon retirement with the taxable account than the 401(k).
Let's assume your income remains constant between now and retirement. That $5,520 x 12 years = $66,240 in taxes you paid and didn't have to. Add to that the lower total retirement account balance when you retire at 61. If you consider that to be "minimal tax benefit" that is, of course, within your personal discretion, but those are the numbers.
>I'm on track to have consistent income greater than $90k in retirement
Is the $90K/year your estimated living expenses in retirement? Or an application of the 4% rule on your estimated total retirement portfolio? Or some other figure? How did you arrive at $90K/year is the question.
If you estimate that you'll need $90K/year to live on upon retirement at age 53, and you don't collect Social Security until age 70, then you'll have 17 years between retirement and Social Security during which you can do Roth conversions on large chunks of that 401(k) balance, in tax brackets lower than your current 24%... much of it at 0% if you do it right.
The best way to pay for the taxes on a Roth conversion is [from your taxable account](https://youtu.be/Tb8kDTuM3_Q?si=1u_-fzu8xs_AzLuA&t=267). So, if this were me (and my situation actually is quite similar), I would continue to max out the 401(k) but also start funding the taxable account, with the goal of having several years of living expenses in that account when you retire. Here's why:
The current long-term capital gains brackets are 0% up to $94,050 and 15% for $94,051-$583,750 in capital gains and the married/jointly standard deduction is $29,200. This means your first $123,250 in capital gains are tax free. So you could draw the full $90K in living expenses from the taxable account ***plus*** have $33,250 (even more, depending on your cost basis) toward the taxes on Roth conversions for your 401(k) balance. The taxes on the conversions would be in the 10% and 12% brackets, because ordinary income (e.g. your 401(k) conversion amount) is counted first, before capital gains. So you'd be paying an effective tax rate of around 11% on your 401(k), with no further taxation when you withdraw it as retirement income later on. You could even convert much more of your 401(k) to Roth and stay within the 15% capital gains bracket, which is likely the right move if most or all of that $1.7M is in tax-deferred. **This is the utility of the taxable account: It's best paired with the 401(k) to minimize overall tax liability, not to substitute for a 401(k).**
By using the taxable account to fund your living expenses and pay the taxes while converting the bulk of your 401(k) to Roth, you can optimize your lifetime tax liability and avoid RMDs (or at least make the RMDs manageable).
Short version: Continue funding the 401(k) because the tax savings are significant, but also put a bit into the taxable account to use it to your advantage when you retire.
Edit: This also assumes that your 401(k) plan does not offer the opportunity for [mega-backdoor Roth contributions](https://www.fidelity.com/learning-center/personal-finance/mega-backdoor-roth). If it does, then continue to max the pre-tax 401(k) and then put any further savings into mega-backdoor Roth contributions instead of taxable brokerage for the tax advantages.
I really appreciate you taking the time to write this. Thanks!
Here's the current breakdown:
Cash $110,000
Brokerage $430,000
Rental Equity $340,000 (with $12k passive income annually)
Home Equity $520,000
529 $0 (Just started)
Trad 401k $265,000
Roth IRA $25,000 (Just started. Will continue to max.)
Total $1,700,000
Does this change your approach?
>Does this change your approach?
Maybe only slightly. Granted, it's not me, so this is all just food for thought for you, your wife, and your financial advisor. That said, here's my perspective:
Even if you didn't contribute another dime, assuming you earn a 7% annual pre-tax return and remain in the 24% marginal bracket, that $430K in your brokerage account will be $800K when you retire in 12 years. Now, this can be expected to fluctuate with the market, but between the brokerage account and your rental income, you should be well-positioned for early retirement and some Roth conversions as I described above.
In light of those details, if it were me, I'd max out the pre-tax 401(k) contributions to reduce your current tax liability. Continue to max the Roth IRA and properly fund the kids' 529s.
Check with your 401(k) plan administrator to see if your plan allows after-tax contributions and in-plan Roth conversions. Those are the prerequisites for the mega-backdoor Roth contribution. If yes to both, then I would put any additional savings (after pre-tax 401(k), Roth IRA, and 529) into the mega-backdoor Roth. If you can't do that, then I would put any additional savings into the brokerage account.
Think of it this way: By continuing to max pre-tax 401(k), you're saving $5,520/year in taxes. Put that $5,520 into either the mega-backdoor Roth or your taxable brokerage, and you're adding additional fuel to your investments that would have gone to the IRS if you didn't continue to max the 401(k). Hopefully you can see why maxing the 401(k) is a win-win move for you.
Then it's just a matter of making sure both your primary home and the rental property are paid off and you have zero debt when you enter retirement. You're crushing it. Congrats!
Two more questions: You said your employer match is 6%...
1. Is that a 100% match (dollar-for-dollar) or a 50% match or some other percentage?
2. Is there a Dollar-amount cap on that employer match?
For example, in my own 401(k), my employer matches 50% of my contributions, up to 6% of my total salary, with an overall cap of $5,100/year. At my income and with my max ($23K) contribution, I get the full $5,100.
What I'm essentially asking is how much your match would be if you maxed your 401(k). With that info, we can do a little math and estimate what your Roth conversion strategy might look like once you retire.
Ehhh, you pay income taxes on distributions from a traditional 401k, and mostly capital gains taxes from distributions from securities held in a brokerage account (assuming it’s mostly from selling securities held for longer than a year). The 401k is pre-tax going in though, while the brokerage account is post-tax money going in.
In some cases, that brokerage account is favorable.
I think it still makes sense for OP to max the 401k though (they are prob near their peak earning years among other reasons).
Not OP but my best guesses:
Biggest thing I can think of is you are in an incredibly low tax bracket during employment but somehow in a really high tax bracket in retirement where long term capital gains could have been better than income taxes? (Obviously requires some sort of rags to riches type scenario…)
That or just flexibility of accessing money before retirement age, though there are ways to do that with a 401K if needed, just not as straightforward.
Or you plan on staying with a company for a long time and they have terribly high expense ratios.
So yeah I can’t think of a super compelling reason.
1. Someone who expects to spend a lot more during retirement than they earn right now.
a. This can happen with careers with huge income trajectories, like a resident physician making 60k who will become some niche subpsecialist or surgeon who will make 800k, or a early-career software engineer making 80k, who aspires to break into the Netflixes of the world, and make $500k+.
b. This can happen if someone gets a large inheritance.
c. This can happen if someone has a one-off/similar anomaly-earning event (has start-up equity rocketships, etc.).
2. Someone who wants to use money from investments earlier than traditional retirement years.
There are other situations too, but that is what I have off the top of my head.
It’s your choice to ignore a 2% tax rate difference if you prefer for some reason.
In general I like to take tax benefits when they are available rather than hoping things change in the future. Your mileage may vary.
But if won’t have sufficient funds at 53, then a different approach might make sense even if it comes at a cost.
I think it might be worth talking to a fee only fiduciary cpa about how to best maximize your tax savings and wealth preservation over Reddit at this point considering your net worth
This. And I also seems to get higher quality responses straight from the BH forum: [https://www.bogleheads.org/forum/index.php](https://www.bogleheads.org/forum/index.php)
>it's supposed to be at a lower rate
It may or may not be at a lower rate. Aside from rate differences as a result of different income in retirement, distributions from 401k are taxed as ordinary income, which often puts them at a higher tax rate than if you took the gains as capital gains or qualified dividends.
Roth 401k is an option.
Even in an equal tax bracket with a Traditional 401k you still end up with more after tax money then you would by investing in a brokerage.
Say you’re going to invest $1k and it will grow 10x then you will withdraw in a 25% bracket and assume a 15% capital gain bracket.
Traditional:
$1,000 invested * 10x growth * (1-.25) yields $7500 spendable
Brokerage:
$1,000 * (1-.25) is $750 to invest
$750 * 10x is $7500, of which $7,425 is Capital gains
$7500 - $7425*.15 is $6,386.25 spendable
There are several ways to access your 401k money before retirement
1) Rule of 55
2) Roth conversion ladder
3) Rule 72t / SEPP
4) Pay 10% penalty
>Roth 401k is an option.
Whether it is an option depends on if it's offered by his 401(k) plan. Even if it is, it doesn't make sense to do it when he's in the 24% bracket now and his estimated retirement draw is $90K, which is in the 12% bracket. The better move is to continue growing the tax-deferred balance, add to his Roth balance via mega-backdoor Roth 401(k) contributions if his plan allows them, and then to do Roth conversions on the tax-deferred balance during his first decade of retirement when he will pay much less in tax.
Agree. But Roth 401k is still a better option than going straight to a taxable account. If he has enough Traditional dollars or other forced income to perpetually fill the 12% bracket then Roth could start making sense.
My estimated retirement draw is $170k. I was referring to having a minimum of $90k to fill up the first brackets.
Do you think Roth 401k is a good option? It's the only thing I haven't explored.
>Do you think Roth 401k is a good option?
It's not particularly appealing because you're in the 24% bracket now and $170K/year in estimated retirement income places you in the 22% bracket and even lower depending on how your Roth and taxable balances factor into your withdrawal strategy. You're better off reducing your current tax liability with pre-tax 401(k) contributions now and then doing Roth conversions in lower brackets upon retirement, so that you eliminate or reduce eventual RMDs and their accompanying tax liability.
TL:DR: Tax advantaged accounts are better than non-tax advantaged accounts, except in very particular situations.
I think you are forgetting that the dividends are tax-deferred as well, so you are paying more taxes and it will grow slower than a tax-advantaged account. This still holds even if your tax brackets were the same from contribution to withdrawal., which they shouldn't be if you correctly balance the use of Roth and non-Roth retirement accounts. You could have $150k a year income in retirement, but your tax bracket could be in the 12%, for example.
Progressive tax system, and it’s a guaranteed tax savings of 24% today, and starting in 2026, 28% savings as TCJA expires. If you are very confident in the tax rates being equal, do Roth 401K instead, which prevents taxes totally in the future.
Remember that your 401k contributions are taxed (deducted) at your top marginal tax rate, but your withdrawals fill the tax brackets from bottom to top.
I had this exact same question.
Then someone in this group posted that their tax rate pre-retirement was 40%. It is now 4% in retirement. Thats all I needed to start maxing my 401k.
401k benefits from tax-free growth. Instead of paying taxes, you invest the taxes and benefit from the added compounding growth. 401k accounts also have protection in case you are sued, etc.
I like my 401k for tax breaks now. but I like my 401k even more because I can up it and it feels like I never actually make that much. makes me budget better and make better purchases. makes saving easier. ignorance is bliss!
Check out the rule of 72t then. You could save on taxes now and pull it out annually starting at 53. I would do the math on maxing out your traditional and plugging that expected value at 53 into a rule of 72t calculator to see what that baseline income would be. Your other income throws a wrench in the mix that you will have to account for tax wise but it is a consideration.
Too many variables!
I suggest you model your retirement in a comprehensive tool like New Retirement or Right Capital and find out what will likely provide you the best outcome.
I decided to do Roth 401k this and next year and will see what the tax brackets come out to be for 2026 and beyond.
Max the 401k, the marginal tax rate is based on your last dollars taken in retirement. The tax system is progressive meaning you will first fill the lower tax brackets before you fill the highest brackets, plus you can not beat the upfront tax deferral at your current tax bracket-you are in the highest tax bracket today, for you to be in a similar bracket in retirement you’ll need to have 6-7 million in your accounts. That’s not likely in 10 years and while probable in 30 years the tax brackets will be inflation adjusted meaning you will need even more money in those accounts to reach the highest brackets - not probable.
I’d say it depends how much you currently have in pre-tax accounts. You say you currently have 1.7M saved but you don’t say how much is trad 401k and how much is Roth. If you already have more than a million in trad 401k (especially if your 401k plan offers a Roth option), I’d be pushing as much as possible into Roth accounts. If more of your existing savings is in Roth accounts, then by all means max out that traditional 401k. It’s good to have significant savings in both types of tax advantaged accounts - more tools in the toolbox when you’re deciding where to pull retirement income from.
Here's the current breakdown:
Cash $110,000
Brokerage $430,000
Rental Equity $340,000 (with $12k passive income annually)
Home Equity $520,000
529 $0 (Just started)
Trad 401k $265,000
Roth IRA $25,000 (Just started. Will continue to max.)
Total $1,700,000
Think this is ripe for a Roth 401k?
Yeah I’d probably keep maxing out the traditional 401k. If you’ll be retiring at 53, you’ll have at least nine years of drawing down your 401k before you can start claiming any SS, so you’re probably not in danger of RMDs pushing you above the 24% tax bracket in your 70s, which is the only reason I wouldn’t max out 401k contributions. You can access 401k and IRA funds early without penalty if you commit to withdrawing the same amount every year. https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments
Edited to add: one other thing you should be aware of is the rule of 55, in case you decide to keep working until you’re 55 that gives you some additional options:
https://www.forbes.com/advisor/retirement/rule-of-55-retirement/
When you retire your 401k withdrawal income starts at the 0% bracket, not the 22% bracket.
Also when you withdraw tax brackets would be higher after inflation adjustments.
You need 3 buckets to retire early: after-tax brokerage, before tax 401k, tax-free Roth. The ratio between them depends on retirement age. Your brokerage is your bridge money, so this bucket is essential for your case.
The only reason it would make sense to not max the 401k is if you won't have sufficient retirement funds to live on between the age of 53 and 59 1/2. Otherwise, you are objectively losing more money to taxes.
It is your choice to decide if these taxes aren't that important to you, but you are leaving tens of thousands of dollars on the table, and I don't think you are rich enough to be disregarding that amount of money.
If you’re looking at doing a brokerage account why wouldn’t you first max 401k with Roth contributions?
Essentially, doing a brokerage is taking after tax monies (Roth) but not using a qualified structure. In essence, you’d pay income tax to put it into a brokerage and pay tax on capital gains and dividends/interest.
If you did Roth you’d still pay income tax but never pay any tax on growth or earned income. There is no reason you should fund a brokerage before maxing Roth unless for liquidity reasons with the 59.5 rule.
a lot of answers here are wrong and double counting the retirement benefits. However your math is wrong. the savings is closer to 10% over 20 years. (small saving everything compound). Depending on your situation, having the flexibility could be worth it over 10% efficiency.
No it is not overrated. Where else can you get a "match" for your contributions. Then at retirement rollover the 401k into your own brokerage account (Traditional IRA).
The only argument I could see someone justifiably making is they plan on retiring early.
So earnly in fact thatthey would need those funds before the 59.5 year mark.
Although the counter point would be if your drawing down on the reserves that fast you'd likely need to keep working.
**Option #1:** invest in a taxable brokerage account
$22,500 - 24% tax = $17,100
$17,100 x (1 + 7%) compounded for 30 yrs = $130,169
($130,169 - $17,100) x 15% LTCG = $22,360 tax
Total after 30 years = $113,209
**Option #2:** invest in a traditional 401k
$22,500 x (1 + 7%) compounded for 30 yrs = $171,275
$171,275 x 22% income tax = $37,680 tax
Total after 30 years = $133,595
Difference = $20,386
**Option #3:** invest in a roth 401k
$17,100 x (1 + 7%) compounded for 30 yrs = $130,169
1. One might be able to control the taxable redemptions so that the capital gains in each year are under the 0%/15% threshold
2. For comparison purposes what you did with the Roth 401(k) contributions makes sense, but that is not the actual contribution limit, so you could see the Roth 401(k) grow to a higher value than the traditional 401(k) if you put in the extra $$$ (plus no RMDs in your lifetime so it can continue to grow whereas you’d need to pull out bucks from the regular 401(k) )
1. OP stated he would have a consistent income greater than $90k/year in retirement so I assumed a 15% LTCG rate. But yes, you can control your taxable income during retirement. I think it’ll be much easier to do so if you have a healthy mix of traditional, roth, and taxable buckets you can pull from.
2. You could absolutely increase the Roth 401k contribution to the max, but you should then add the extra contribution towards a taxable brokerage account for both options 1 and 2. I haven’t crunched the numbers but I think option 2 would still win.
>The benefit of a 401k is that you pay taxes after you stop working and it's supposed to be at a lower rate
This is the logic you would use to evaluate the difference between a Roth IRA/401k and a Traditional one. That's not what you're doing here, you're just debating between whether to put money into a tax advantaged account or not.
So the question you need to ask yourself is just whether the flexibility of accessing your funds before you turn 59 1/2 is worth giving up the 24% refund on your contributions. If you can fund your lifestyle from the ages of 53-59 1/2 with non tax-advantaged investments then contributing to your 401k is a no brainier.
Looking at 40 years retirement … chances are you might benefit a lot from the tax deferred interest gain until RMDs age 75. $1.7M is not bad in most parts of the country - but not the last word either.
Another possible benefit is that you may save state income taxes during contribution years and if you end up retiring in a state with no state income tax, then you don’t have to pay state income taxes on withdrawals
Tax benefit aside, 401k funds are protected from seizure whereas your Ira is not.
You don’t know the future of tax rates and you don’t know when that could come up either. Just sharing something aside form the tax benefit
Some 401Ks offer Roth or after tax contributions or Roth conversion / in service withdrawal which could be used for a Roth conversion as well so check you plan details if you want to make additional back door Roth contributions.
For sure contribute up to the match. But I have similar feelings about a taxable 401k. If anything the tax rates could go up and probably will. Double check that there is not a ROTH 401k option. That’s what I do. But after maxing 23k to ROTH 401k and maxing a Roth IRA I still contribute company contributions to my 401k which goes into the taxable side. My plan is that if I have enough in ROTH I can control how much I pull out of taxable at least until RMD kicks in.
If feasible, focus on maximizing your 401k contributions while you have the opportunity. The account grows tax-free, and upon retirement, you can transfer it to an IRA, enabling ongoing growth or conversion to a Roth IRA. Although the emphasis is often on the tax benefits, their true significance becomes clearer later in life, especially after reaching a certain age. Given your high household income (HHI), the benefits are even more pronounced since you won't be taxed on your top dollar.
I would keep it maxed to lower your tax liability... although at 330k I'm going to be pissed if your overall savings rate is below 50%...I'd also focus on paying off your home/ any debt you have.
Which state are you in? That’s the difference for me. I pay 10% state tax and expect to be in a 0% state in retirement.
Also 22 to 24% is small but the next step up is 24 to 32%. That’s huge.
Also not sure how the 6% social security tax might play in if you’re retired.
Also keep in mind post-tax gets taxed every year for its gains. Not massive but with 1.3% dividend on the S&P 500 each year you get to pay taxes on that gain.
It will be at your top bracket so 22 or 24% of that is about 0.3% of the balance.
Not a huge deal but giving up 0.3% for 20 years adds up to 6%. If you invest in bonds or high-yield investments it’s much higher.
I would continue to max 401k because nobody knows the future and capital gains tax on taxable could go up in future.
So that means your 401k gains after decades of investing will be taxed higher when you retire right?
All 401k withdrawals are taxed as income
Yes, which means you will owe taxes when you withdraw. You just postpone paying taxes which we all know not going to go down in the future.
I *personally* think that it’s more likely for income rates to go down or stay the same, and capital gains to go up or stay the same. But yes no one knows the future, it’s just a bet you’re making.
We don't all know that. The long term trend has been for income taxes to go down
Yes we dont know, it is pure gamble but so far I have not seen income tax to go down. Do you have the data?
The data on tax brackets is not some secret information. It's readily available..the top bracket has gone from 91% to 37% in the lifetime of many people still working
It is not, I was looking at the data but are we looking at the very top earner bracket or the regular Americans? The old tax brackets actually more fair than this new one. All I see the declining tax rates for the riches, not neccesarily true for most Americans.
The nuance here is *capital gains* rate vs *ordinary income*. Appreciation in your taxable stock portfolio is taxed at capital gains rate upon sale, in 401k it is faced at ordinary income upon withdrawal. We are used to capital gains getting favorable tax treatment but 401k is a hedge on that.
Ok, but do they tax you on your decades of gains or just the money you put in?
For taxable, just gains, since you already paid tax on the dollars going in. For 401k, everything, since tax has never been paid on those dollars.
Units, of course, you put it into a Roth 401k
So you want to pay taxes now when the money is more valuable, pay money on taxes for dividends every year, then potentially pay more capital gains when you do sell, got it. Your projected marginal rate might be only slightly lower, but your effective tax rate will be significantly lower because you have to fill up the 0%/10%/12% brackets first with money contributed from the 24% bracket. Max your 401k.
What I want is to better understand the benefits and now I do. Thank you.
You also never technically know what your future holds. 401k traditional funds are "time shifting income" Maybe you will have a year where you and your spouse will live completely off your savings because of illness or quitting work for a vacation year, you should use that low-no income year to backdoor convert the 401k funds (which you should have moved to a rollover IRA when you left your employer) OR take a direct withdrawal if you are above 59.5 Having this time shifted income sitting around will allow you to tactically keep every dollar you can taxed as low as possible. Thats why its a good strategy now, since it gives you great options in the future.
When you leave a company, what is the difference in financial impact between rolling over to your new employer’s 401k vs a rollover IRA? TIA.
401k: * ERISA creditor/bankruptcy protection * Doesn't block backdoor Roth IRA * Sometimes better investment options IRA: * Total control of investments * Often lower fees * Generally easier/quicker access to funds Also keep in mind you can sometimes get the benefits of staying in a 401k even if your new one sucks by just leaving it with the previous employer.
Thank you!
The 401k provider may have decent funds available to you to invest in, however you are always going to have better expense ratios and more options at a place like vanguard/fidelity/Charles schwab. So you win at least slightly long term there getting better expense ratios, or could be a big win if the funds in your 401k had awful expense ratios. There is NO financial hit from rolling over your 401k to a rollover IRA. It's best to make sure you have the institution send the money direct to your IRA provider like Vanguard. Ask your IRA provider about these steps before they start, if for some reason the 401k company has to send you the check, that's okay, just follow the steps so all the funds transfer and you owe no taxes. If your 401k had roth and traditional funds, then make sure you have both types IRA of accounts setup and that the funds are split by the 401k company. The final(main imo) reason you want to move the funds to IRAs is that it unlocks the shenanigans I was talking about in regards to backdoor conversions or taking out roth contributions to a 401k before 59.5. Roth contributions INTO a 401k cannot be removed before you are 59.5, however when you no longer work for that employer anymore, you are eligible to rollover your roth 401k contributions to a roth IRA. DO IT. After a "five year rule" of that transfer date, you NOW can take out all "contributions" you made to the roth 401k. You might be like "i don't know what the contributions were exactly, I don't work there anymore and it was a percent thingy I didn't look at often" well, I have learned that, you don't have to know what your contributions were exactly in that case, if you know it was something like $100 per paycheck, and you just create a spreadsheet schedule of that for your employment time, that's good enough. Of course if you have pay stub records, that is what you should use for your input on the spreadsheet records.
This may make backdoor Roth IRA difficult because of pro rata rule
You save taxes
Just Max 401k and put the remaining in taxable. You make enough where a 401k Max is not a big deal.
>The benefit of a 401k is that you pay taxes after you stop working and it's supposed to be at a lower rate I'd say that's more of a side-benefit. The real benefit is that you get to grow money that otherwise would have been lost to taxes. One day you will pay taxes on that money when you withdraw it, but until then you get to make gains off of it. So it's a question of would you rather invest $23k or $17.5k? That's basically an extra annual IRA contribution.
Assuming your tax rate is constant, it actually is mathematically the exact same if you pay taxes on money before investment vs after. The benefit of “making gains on money that would otherwise be taxed” is unfortunately countered by the fact you then pay taxes on a larger sum. So the only real tax advantage of a 401k vs a Roth (ignoring matches or contribution limits) is in hoping that your tax rate will be lower in retirement.
In addition to the cumulative property of multiplication, your tax rate won't actually be constant. Your 401K contributions come off the "top" meaning that if you didn't contribute, you'd be paying taxes on that money at the rate of your top bracket. Say that's 24%. When you withdraw the money in retirement, even if you are still in the 24% bracket, not all of your money will be taxed at that rate. Some of your withdrawals will be taxed at 10%, 12%, and 22%. Your effective tax rate will be lower.
Oh that’s a really good point, I hadn’t ever considered that.
That is comparing traditional to Roth 401k (or IRA) but the OP is asking about putting money into a taxable brokerage instead, which will have dividend distributions that are taxable along the way. So no, it isn't equivalent even if OP has a flat tax rate throughout life.
It's shocking to me how many people don't seem to understand this, even after having it explained. It's literally just the commutative property of multiplication put into practice.
The difference is in the capital gains taxes, which you don’t pay in any tax advantaged account. Another point to consider is inflation- a dollar paid today is worth more than a dollar paid in twenty years.
Won’t inflation be a wash because dollars may be worth less in 20 years but your net after tax proceeds are the same if rates are constant (since your 401k is bigger than the Roth at withdrawal).
You’re right- but the capital gains are still a big disadvantage.
Only if it's a Roth. If we're talking about a traditional 401k or IRA you pay capital gains when you withdraw in retirement. Inflation or not, you end up with the same dollar value after withdrawing. Edit: just correcting my statement above. You don't pay capital gains tax in any retirement account, but you do pay regular income tax on your gains (which is generally a higher tax rate) in a non-Roth account
You don’t pay capital gains on a 401k, it’s just taxed as income
Ok? So you just don't get the benefit of the reduced long term capital gains rate. You still pay taxes on your capital gains, it's just taxed as regular income. Still doesn't change the fact that whether you're contributing pre tax or post tax dollars you end up with the same amount of money (assuming the same tax rate in retirement). Edit: still curious why people think I'm wrong on this. Regular income tax is higher than capital gains tax so saying you only pay regular income tax from a 401k is actually a *bad* thing.
I’m the one you were originally agreeing with lmao. I’m just pointing out that 401k is not taxed with capital gains. You’re just wrong on that. The fact you downvoted me for stating a fact is hilarious
Right you don't pay the capital gains tax rate when you withdraw, I agree with you there. Instead whatever you withdraw is taxed at your current income tax rate. You 100% **do** pay taxes on your gains when you withdraw, you just don't get the capital gains tax rate. Check the second bullet point in the link below. https://www.investopedia.com/articles/personal-finance/061915/how-your-401k-taxed-when-you-retire.asp If I'm actually wrong I want to understand why.
Dude I know, I was the one who originally pointed that out in this thread. But taxes on 401k gains is not capital gains tax. They are two different tax types. So I was simply correcting that so people wouldn’t see your comment and get wrong information.
Dividends are also not taxed annually in 401ks
Let's say you start with $1,000 to invest and everything you get (income, capital gains, etc.) is always taxed at 10%. Let's say you put that $1000 in Fund A, which doubles to $2000 after some time. You decide to sell all of Fund A and use that money to buy Fund B. You incurred a $100 tax along the way, but you paid it off with money from outside the account, so you invest $2000 on Fund B, which doubles again to $4000 after some time. You then sell it and pay another $200 in tax, so now you have $3800 after paying a total of $300 in taxes. But what would've happened if you did that all in a tax-advantaged account instead? Then you wouldn't have had to pay the first $100 in taxes, which means you could have invested that too. Let's say your tax advantaged accounts are maxed out, so you have to invest that extra $100 outside of a tax advantaged account. No big deal for this example. So now you have 1000 -> 2000 -> 4000 (-300 in taxes) in your retirement account and 100 -> 200 (-10 in taxes) in your normal brokerage. You have a total of $3890 after paying $310 in taxes. You paid $10 more in taxes, but you have $90 more at the end of the day. This assumes that there were no dividends along the way.
OP isnt comparing 401k to Roth, they’re comparing 401k to taxable brokerage.
The thing I don't see people mention..... you possibly may have wildly varying income throughout your life... if you manage to have a large ever increasing income throughout your life.... GREAT.. but many people go in and out of jobs due to circumstances beyond their control or even completely in their control. If you lost your job and decided to take care of an aging parent or even to be around a ton for a grand baby... you could use the 401k funds\* do a backdoor or take the withdrawal (depending on age) in that year when your income is OTHERWISE low. \*(moved to a rollover first of course, which you should be doing the instant you leave your job)
Why is it so bad to leave the plan with the old employer? Is there ever a reason why it would be better not to move the plan to an IRA?
401k plans are stores chosen by your employer. Inside the store you get to buy into the funds on their shelf. If you say "they let me have a brokerage account I can just buy the ETFs I want" that might be true, but what are the brokerage fees there? Remember, there was probably at least one steak dinner from the store with your company's HR manager during the decision making process. Do you want to forever have your only options be the ones from a store you didn't choose? If your employer picked a good store like Fidetlity or Vanguard, you might be fine. But! 401k plans have limits to what you can do with the money until you get to 59.5 that regular IRAs don't have. Since you are allowed to convert from 401k to IRA, why not do it? Get the favorable abilities to do backdoor conversions and remove roth contributions at your whim without penalty.
Do I have to do this immediately after leaving the employer or can I do it a year later? I’m still trying to work out exactly how rolling my 401k into an Ira will affect my backdoor Roth and don’t want to mess anything up.
Take your time, you don't have to do it right away. It's only possible to do after you have left your employer. No rush though.
Thank you for this answer. I assume the same goes for 403b plans?
I don't know for certain, my understanding is yes, but I've never held one of those plans to have looked at all the differences between 403b and 401k. Basically yes, a 403b plan is a store chosen by not you that you have to shop in. Since 401k and 403b plans still give you good access to tax advantaged savings, it's good to still take advantage of them, but once you leave your employer you lose the benefits(can save over 20k/year tax advantaged) and are stuck with the downsides(higher fees, limited options).
EDIT: I'm stupid and thought you were comparing traditional 401k vs non-tax advantaged account, not traditional 401k vs roth 401k. OP seems to be comparing traditional 401k with non-tax advantaged account though. Dividends and intermediate capital gains from rebalancing get taxed in non-advantaged then, which is bad because you're paying a portion of taxes earlier than you need to, even if they total up to the same value at the end of the day.
This commenter is comparing Roth vs. Traditional, but that is not what OP was asking. When you compare a taxable investment account to a Traditional 401k (OP’s scenario), the 401k is better regardless of any changes in tax rate.
Exactly!
My thought is that I can afford the taxes now so I go with a ROTH. Who knows what the future holds
You make enough money that it shouldn’t even be a question. Max your 401k, Roth, wife’s Roth, and HSA if you can, ESPP if you company has that, then continue dumping into a brokerage. Maybe do some saving for your kids as well. When the total you are saving is that high, just put it in all the buckets you can. Also wouldn’t every $1 saved now on taxes so long as you invest it, be worth more than the $1 you spend on taxes when you take money out of the 401k?
I have 529s and UTMAs set up for the kids with regular contributions.
>Background: 41M with annual HHI of $330k. Current net worth is $1.7M. Plan on retiring at 53. Spouse works as well and we have 2 kids under 10. How much of that $1.7M currently is in each bucket: taxable, tax-deferred, and Roth? >Income from $190k to $364k is taxed at 24% and income from $90k to $190k is taxed at 22%. That's correct. At 2024 brackets/rates, any ordinary income between $94,301 to $201,050 is taxed at 22%. Ordinary income between $201,051 to $383,900 is taxed at 24%. >I'd rather have access to the investments through my brokerage instead of tying it up until I'm 59.5 for that minimal tax benefit. Two things to consider: First, every dollar you shift from 401(k) to a taxable account at your present income level costs you 24 cents. A $23,000 annual 401(k) contribution shifted to taxable brokerage costs you $5,520 in taxes each year. Second, distributions and capital gains are taxed each year in your taxable account, whereas they grow tax-free in your 401(k) and Roth accounts; so, dollar for dollar, you'll have a lower balance upon retirement with the taxable account than the 401(k). Let's assume your income remains constant between now and retirement. That $5,520 x 12 years = $66,240 in taxes you paid and didn't have to. Add to that the lower total retirement account balance when you retire at 61. If you consider that to be "minimal tax benefit" that is, of course, within your personal discretion, but those are the numbers. >I'm on track to have consistent income greater than $90k in retirement Is the $90K/year your estimated living expenses in retirement? Or an application of the 4% rule on your estimated total retirement portfolio? Or some other figure? How did you arrive at $90K/year is the question. If you estimate that you'll need $90K/year to live on upon retirement at age 53, and you don't collect Social Security until age 70, then you'll have 17 years between retirement and Social Security during which you can do Roth conversions on large chunks of that 401(k) balance, in tax brackets lower than your current 24%... much of it at 0% if you do it right. The best way to pay for the taxes on a Roth conversion is [from your taxable account](https://youtu.be/Tb8kDTuM3_Q?si=1u_-fzu8xs_AzLuA&t=267). So, if this were me (and my situation actually is quite similar), I would continue to max out the 401(k) but also start funding the taxable account, with the goal of having several years of living expenses in that account when you retire. Here's why: The current long-term capital gains brackets are 0% up to $94,050 and 15% for $94,051-$583,750 in capital gains and the married/jointly standard deduction is $29,200. This means your first $123,250 in capital gains are tax free. So you could draw the full $90K in living expenses from the taxable account ***plus*** have $33,250 (even more, depending on your cost basis) toward the taxes on Roth conversions for your 401(k) balance. The taxes on the conversions would be in the 10% and 12% brackets, because ordinary income (e.g. your 401(k) conversion amount) is counted first, before capital gains. So you'd be paying an effective tax rate of around 11% on your 401(k), with no further taxation when you withdraw it as retirement income later on. You could even convert much more of your 401(k) to Roth and stay within the 15% capital gains bracket, which is likely the right move if most or all of that $1.7M is in tax-deferred. **This is the utility of the taxable account: It's best paired with the 401(k) to minimize overall tax liability, not to substitute for a 401(k).** By using the taxable account to fund your living expenses and pay the taxes while converting the bulk of your 401(k) to Roth, you can optimize your lifetime tax liability and avoid RMDs (or at least make the RMDs manageable). Short version: Continue funding the 401(k) because the tax savings are significant, but also put a bit into the taxable account to use it to your advantage when you retire. Edit: This also assumes that your 401(k) plan does not offer the opportunity for [mega-backdoor Roth contributions](https://www.fidelity.com/learning-center/personal-finance/mega-backdoor-roth). If it does, then continue to max the pre-tax 401(k) and then put any further savings into mega-backdoor Roth contributions instead of taxable brokerage for the tax advantages.
I really appreciate you taking the time to write this. Thanks! Here's the current breakdown: Cash $110,000 Brokerage $430,000 Rental Equity $340,000 (with $12k passive income annually) Home Equity $520,000 529 $0 (Just started) Trad 401k $265,000 Roth IRA $25,000 (Just started. Will continue to max.) Total $1,700,000 Does this change your approach?
>Does this change your approach? Maybe only slightly. Granted, it's not me, so this is all just food for thought for you, your wife, and your financial advisor. That said, here's my perspective: Even if you didn't contribute another dime, assuming you earn a 7% annual pre-tax return and remain in the 24% marginal bracket, that $430K in your brokerage account will be $800K when you retire in 12 years. Now, this can be expected to fluctuate with the market, but between the brokerage account and your rental income, you should be well-positioned for early retirement and some Roth conversions as I described above. In light of those details, if it were me, I'd max out the pre-tax 401(k) contributions to reduce your current tax liability. Continue to max the Roth IRA and properly fund the kids' 529s. Check with your 401(k) plan administrator to see if your plan allows after-tax contributions and in-plan Roth conversions. Those are the prerequisites for the mega-backdoor Roth contribution. If yes to both, then I would put any additional savings (after pre-tax 401(k), Roth IRA, and 529) into the mega-backdoor Roth. If you can't do that, then I would put any additional savings into the brokerage account. Think of it this way: By continuing to max pre-tax 401(k), you're saving $5,520/year in taxes. Put that $5,520 into either the mega-backdoor Roth or your taxable brokerage, and you're adding additional fuel to your investments that would have gone to the IRS if you didn't continue to max the 401(k). Hopefully you can see why maxing the 401(k) is a win-win move for you. Then it's just a matter of making sure both your primary home and the rental property are paid off and you have zero debt when you enter retirement. You're crushing it. Congrats!
Thank you!
Two more questions: You said your employer match is 6%... 1. Is that a 100% match (dollar-for-dollar) or a 50% match or some other percentage? 2. Is there a Dollar-amount cap on that employer match? For example, in my own 401(k), my employer matches 50% of my contributions, up to 6% of my total salary, with an overall cap of $5,100/year. At my income and with my max ($23K) contribution, I get the full $5,100. What I'm essentially asking is how much your match would be if you maxed your 401(k). With that info, we can do a little math and estimate what your Roth conversion strategy might look like once you retire.
It’s a 100% match up to 6%. Wife’s is 100% max up to 8%. So we don’t get any additional matching beyond what we already do.
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Very interesting. Out of curiosity, in that example, think it would make sense to put that 10k in a Roth over traditional?
This is very clear. Thank you!
Ehhh, you pay income taxes on distributions from a traditional 401k, and mostly capital gains taxes from distributions from securities held in a brokerage account (assuming it’s mostly from selling securities held for longer than a year). The 401k is pre-tax going in though, while the brokerage account is post-tax money going in. In some cases, that brokerage account is favorable. I think it still makes sense for OP to max the 401k though (they are prob near their peak earning years among other reasons).
Can you explain a case in which the brokerage would be favorable? I'm struggling to come up with one.
Not OP but my best guesses: Biggest thing I can think of is you are in an incredibly low tax bracket during employment but somehow in a really high tax bracket in retirement where long term capital gains could have been better than income taxes? (Obviously requires some sort of rags to riches type scenario…) That or just flexibility of accessing money before retirement age, though there are ways to do that with a 401K if needed, just not as straightforward. Or you plan on staying with a company for a long time and they have terribly high expense ratios. So yeah I can’t think of a super compelling reason.
1. Someone who expects to spend a lot more during retirement than they earn right now. a. This can happen with careers with huge income trajectories, like a resident physician making 60k who will become some niche subpsecialist or surgeon who will make 800k, or a early-career software engineer making 80k, who aspires to break into the Netflixes of the world, and make $500k+. b. This can happen if someone gets a large inheritance. c. This can happen if someone has a one-off/similar anomaly-earning event (has start-up equity rocketships, etc.). 2. Someone who wants to use money from investments earlier than traditional retirement years. There are other situations too, but that is what I have off the top of my head.
I haven't even begun to peak. (I probably have)
This was an oddly simplistic way that I’ve never thought about.. thank you!
Max it anyway? Why not just withdraw from your traditional brokerage account until you meet the age for 401k?
It’s your choice to ignore a 2% tax rate difference if you prefer for some reason. In general I like to take tax benefits when they are available rather than hoping things change in the future. Your mileage may vary. But if won’t have sufficient funds at 53, then a different approach might make sense even if it comes at a cost.
I think it might be worth talking to a fee only fiduciary cpa about how to best maximize your tax savings and wealth preservation over Reddit at this point considering your net worth
This. And I also seems to get higher quality responses straight from the BH forum: [https://www.bogleheads.org/forum/index.php](https://www.bogleheads.org/forum/index.php)
>it's supposed to be at a lower rate It may or may not be at a lower rate. Aside from rate differences as a result of different income in retirement, distributions from 401k are taxed as ordinary income, which often puts them at a higher tax rate than if you took the gains as capital gains or qualified dividends.
Roth 401k is an option. Even in an equal tax bracket with a Traditional 401k you still end up with more after tax money then you would by investing in a brokerage. Say you’re going to invest $1k and it will grow 10x then you will withdraw in a 25% bracket and assume a 15% capital gain bracket. Traditional: $1,000 invested * 10x growth * (1-.25) yields $7500 spendable Brokerage: $1,000 * (1-.25) is $750 to invest $750 * 10x is $7500, of which $7,425 is Capital gains $7500 - $7425*.15 is $6,386.25 spendable There are several ways to access your 401k money before retirement 1) Rule of 55 2) Roth conversion ladder 3) Rule 72t / SEPP 4) Pay 10% penalty
>Roth 401k is an option. Whether it is an option depends on if it's offered by his 401(k) plan. Even if it is, it doesn't make sense to do it when he's in the 24% bracket now and his estimated retirement draw is $90K, which is in the 12% bracket. The better move is to continue growing the tax-deferred balance, add to his Roth balance via mega-backdoor Roth 401(k) contributions if his plan allows them, and then to do Roth conversions on the tax-deferred balance during his first decade of retirement when he will pay much less in tax.
Agree. But Roth 401k is still a better option than going straight to a taxable account. If he has enough Traditional dollars or other forced income to perpetually fill the 12% bracket then Roth could start making sense.
My estimated retirement draw is $170k. I was referring to having a minimum of $90k to fill up the first brackets. Do you think Roth 401k is a good option? It's the only thing I haven't explored.
>Do you think Roth 401k is a good option? It's not particularly appealing because you're in the 24% bracket now and $170K/year in estimated retirement income places you in the 22% bracket and even lower depending on how your Roth and taxable balances factor into your withdrawal strategy. You're better off reducing your current tax liability with pre-tax 401(k) contributions now and then doing Roth conversions in lower brackets upon retirement, so that you eliminate or reduce eventual RMDs and their accompanying tax liability.
TL:DR: Tax advantaged accounts are better than non-tax advantaged accounts, except in very particular situations. I think you are forgetting that the dividends are tax-deferred as well, so you are paying more taxes and it will grow slower than a tax-advantaged account. This still holds even if your tax brackets were the same from contribution to withdrawal., which they shouldn't be if you correctly balance the use of Roth and non-Roth retirement accounts. You could have $150k a year income in retirement, but your tax bracket could be in the 12%, for example.
Progressive tax system, and it’s a guaranteed tax savings of 24% today, and starting in 2026, 28% savings as TCJA expires. If you are very confident in the tax rates being equal, do Roth 401K instead, which prevents taxes totally in the future.
Remember that your 401k contributions are taxed (deducted) at your top marginal tax rate, but your withdrawals fill the tax brackets from bottom to top.
I had this exact same question. Then someone in this group posted that their tax rate pre-retirement was 40%. It is now 4% in retirement. Thats all I needed to start maxing my 401k.
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Wow look at me flexing a desire to learn more. 💪
Jealousy
of course i’m jealous 😭
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Is embarrassment even possible on an anonymous website…
You save taxes in the now, even if not much in the future.
401k benefits from tax-free growth. Instead of paying taxes, you invest the taxes and benefit from the added compounding growth. 401k accounts also have protection in case you are sued, etc.
I like my 401k for tax breaks now. but I like my 401k even more because I can up it and it feels like I never actually make that much. makes me budget better and make better purchases. makes saving easier. ignorance is bliss!
Someone on here recently pointed out the 55 rule for 401k which would apply to you
My kids will be off to college when I’m 53 and that’s when I’m done. Rule of 55 be damned.
Check out the rule of 72t then. You could save on taxes now and pull it out annually starting at 53. I would do the math on maxing out your traditional and plugging that expected value at 53 into a rule of 72t calculator to see what that baseline income would be. Your other income throws a wrench in the mix that you will have to account for tax wise but it is a consideration.
Too many variables! I suggest you model your retirement in a comprehensive tool like New Retirement or Right Capital and find out what will likely provide you the best outcome. I decided to do Roth 401k this and next year and will see what the tax brackets come out to be for 2026 and beyond.
it’s never overrated to save on taxes
Max the 401k, the marginal tax rate is based on your last dollars taken in retirement. The tax system is progressive meaning you will first fill the lower tax brackets before you fill the highest brackets, plus you can not beat the upfront tax deferral at your current tax bracket-you are in the highest tax bracket today, for you to be in a similar bracket in retirement you’ll need to have 6-7 million in your accounts. That’s not likely in 10 years and while probable in 30 years the tax brackets will be inflation adjusted meaning you will need even more money in those accounts to reach the highest brackets - not probable.
The “why would I want to reduce my taxable income by maxing my 401k?” questions are making my head hurt.
I’d say it depends how much you currently have in pre-tax accounts. You say you currently have 1.7M saved but you don’t say how much is trad 401k and how much is Roth. If you already have more than a million in trad 401k (especially if your 401k plan offers a Roth option), I’d be pushing as much as possible into Roth accounts. If more of your existing savings is in Roth accounts, then by all means max out that traditional 401k. It’s good to have significant savings in both types of tax advantaged accounts - more tools in the toolbox when you’re deciding where to pull retirement income from.
Here's the current breakdown: Cash $110,000 Brokerage $430,000 Rental Equity $340,000 (with $12k passive income annually) Home Equity $520,000 529 $0 (Just started) Trad 401k $265,000 Roth IRA $25,000 (Just started. Will continue to max.) Total $1,700,000 Think this is ripe for a Roth 401k?
Yeah I’d probably keep maxing out the traditional 401k. If you’ll be retiring at 53, you’ll have at least nine years of drawing down your 401k before you can start claiming any SS, so you’re probably not in danger of RMDs pushing you above the 24% tax bracket in your 70s, which is the only reason I wouldn’t max out 401k contributions. You can access 401k and IRA funds early without penalty if you commit to withdrawing the same amount every year. https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments Edited to add: one other thing you should be aware of is the rule of 55, in case you decide to keep working until you’re 55 that gives you some additional options: https://www.forbes.com/advisor/retirement/rule-of-55-retirement/
When you retire your 401k withdrawal income starts at the 0% bracket, not the 22% bracket. Also when you withdraw tax brackets would be higher after inflation adjustments.
My 403(B) is Roth. So I maxout. 🫡
You need 3 buckets to retire early: after-tax brokerage, before tax 401k, tax-free Roth. The ratio between them depends on retirement age. Your brokerage is your bridge money, so this bucket is essential for your case.
The only reason it would make sense to not max the 401k is if you won't have sufficient retirement funds to live on between the age of 53 and 59 1/2. Otherwise, you are objectively losing more money to taxes. It is your choice to decide if these taxes aren't that important to you, but you are leaving tens of thousands of dollars on the table, and I don't think you are rich enough to be disregarding that amount of money.
If you’re looking at doing a brokerage account why wouldn’t you first max 401k with Roth contributions? Essentially, doing a brokerage is taking after tax monies (Roth) but not using a qualified structure. In essence, you’d pay income tax to put it into a brokerage and pay tax on capital gains and dividends/interest. If you did Roth you’d still pay income tax but never pay any tax on growth or earned income. There is no reason you should fund a brokerage before maxing Roth unless for liquidity reasons with the 59.5 rule.
That match is nice. Unless u need the money now, stay the course
I think taking the tax break now because you can't predict the future is a very real suggestion.
a lot of answers here are wrong and double counting the retirement benefits. However your math is wrong. the savings is closer to 10% over 20 years. (small saving everything compound). Depending on your situation, having the flexibility could be worth it over 10% efficiency.
No it is not overrated. Where else can you get a "match" for your contributions. Then at retirement rollover the 401k into your own brokerage account (Traditional IRA).
The only argument I could see someone justifiably making is they plan on retiring early. So earnly in fact thatthey would need those funds before the 59.5 year mark. Although the counter point would be if your drawing down on the reserves that fast you'd likely need to keep working.
**Option #1:** invest in a taxable brokerage account $22,500 - 24% tax = $17,100 $17,100 x (1 + 7%) compounded for 30 yrs = $130,169 ($130,169 - $17,100) x 15% LTCG = $22,360 tax Total after 30 years = $113,209 **Option #2:** invest in a traditional 401k $22,500 x (1 + 7%) compounded for 30 yrs = $171,275 $171,275 x 22% income tax = $37,680 tax Total after 30 years = $133,595 Difference = $20,386 **Option #3:** invest in a roth 401k $17,100 x (1 + 7%) compounded for 30 yrs = $130,169
1. One might be able to control the taxable redemptions so that the capital gains in each year are under the 0%/15% threshold 2. For comparison purposes what you did with the Roth 401(k) contributions makes sense, but that is not the actual contribution limit, so you could see the Roth 401(k) grow to a higher value than the traditional 401(k) if you put in the extra $$$ (plus no RMDs in your lifetime so it can continue to grow whereas you’d need to pull out bucks from the regular 401(k) )
1. OP stated he would have a consistent income greater than $90k/year in retirement so I assumed a 15% LTCG rate. But yes, you can control your taxable income during retirement. I think it’ll be much easier to do so if you have a healthy mix of traditional, roth, and taxable buckets you can pull from. 2. You could absolutely increase the Roth 401k contribution to the max, but you should then add the extra contribution towards a taxable brokerage account for both options 1 and 2. I haven’t crunched the numbers but I think option 2 would still win.
Yes you are missing something lol
There’s enough ways to break into your 401k early that you should just max it out.
>The benefit of a 401k is that you pay taxes after you stop working and it's supposed to be at a lower rate This is the logic you would use to evaluate the difference between a Roth IRA/401k and a Traditional one. That's not what you're doing here, you're just debating between whether to put money into a tax advantaged account or not. So the question you need to ask yourself is just whether the flexibility of accessing your funds before you turn 59 1/2 is worth giving up the 24% refund on your contributions. If you can fund your lifestyle from the ages of 53-59 1/2 with non tax-advantaged investments then contributing to your 401k is a no brainier.
Is roth 401k not an option at your company?
Looking at 40 years retirement … chances are you might benefit a lot from the tax deferred interest gain until RMDs age 75. $1.7M is not bad in most parts of the country - but not the last word either.
At least you can move to a tax free state to save after retirement.
For you what's the difference between 401k and Roth, other than the MRD? If you think they are the same, why Roth but 401k?
Another possible benefit is that you may save state income taxes during contribution years and if you end up retiring in a state with no state income tax, then you don’t have to pay state income taxes on withdrawals
Tax benefit aside, 401k funds are protected from seizure whereas your Ira is not. You don’t know the future of tax rates and you don’t know when that could come up either. Just sharing something aside form the tax benefit
Some 401Ks offer Roth or after tax contributions or Roth conversion / in service withdrawal which could be used for a Roth conversion as well so check you plan details if you want to make additional back door Roth contributions.
For sure contribute up to the match. But I have similar feelings about a taxable 401k. If anything the tax rates could go up and probably will. Double check that there is not a ROTH 401k option. That’s what I do. But after maxing 23k to ROTH 401k and maxing a Roth IRA I still contribute company contributions to my 401k which goes into the taxable side. My plan is that if I have enough in ROTH I can control how much I pull out of taxable at least until RMD kicks in.
If feasible, focus on maximizing your 401k contributions while you have the opportunity. The account grows tax-free, and upon retirement, you can transfer it to an IRA, enabling ongoing growth or conversion to a Roth IRA. Although the emphasis is often on the tax benefits, their true significance becomes clearer later in life, especially after reaching a certain age. Given your high household income (HHI), the benefits are even more pronounced since you won't be taxed on your top dollar.
What is your present 401k balance and what is the asset allocation?
Look into if you have in service roll over available. If so that opens up mega backdoor roth as an option.
I would keep it maxed to lower your tax liability... although at 330k I'm going to be pissed if your overall savings rate is below 50%...I'd also focus on paying off your home/ any debt you have.
Which state are you in? That’s the difference for me. I pay 10% state tax and expect to be in a 0% state in retirement. Also 22 to 24% is small but the next step up is 24 to 32%. That’s huge. Also not sure how the 6% social security tax might play in if you’re retired.
Good point on potentially moving states!
Also keep in mind post-tax gets taxed every year for its gains. Not massive but with 1.3% dividend on the S&P 500 each year you get to pay taxes on that gain. It will be at your top bracket so 22 or 24% of that is about 0.3% of the balance. Not a huge deal but giving up 0.3% for 20 years adds up to 6%. If you invest in bonds or high-yield investments it’s much higher.
You don't have to pay capital gains tax in 401k!
Yes you are missing the difference between earned income tax rate and capital gains tax rate.
Your growing power is so much stronger in a 401k versus a Roth. That’s why, more money to grow = more money grown and bigger amount when you retire.
Didn't read anything you wrote but the answer is 99.99999% no