401K vs Taxable Brokerage Account

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
dskillz1
Posts: 147
Joined: Sat Feb 07, 2015 10:41 pm

401K vs Taxable Brokerage Account

Post by dskillz1 » Tue Sep 11, 2018 4:18 pm

Been reading a lot about the downside of the 401K most notably paying the normal tax rate when you later on withdraw funds and also having your money locked up for decades. I'm curious if anyone out there has bypassed 401K investing and instead went with a taxable brokerage account with the investments of choice for retirement as an alternative? Its tempting to go this route - lower expense ratios, funds of choice, cheaper tax rate upon withdrawal.

I currently max out my 401K and am aware of its benefits but i'm just curious if anyone went the other way with a taxable account for retirement?
Thanks.

tesuzuki2002
Posts: 529
Joined: Fri Dec 11, 2015 12:40 pm

Re: 401K vs Taxable Brokerage Account

Post by tesuzuki2002 » Tue Sep 11, 2018 4:20 pm

dskillz1 wrote:
Tue Sep 11, 2018 4:18 pm
Been reading a lot about the downside of the 401K most notably paying the normal tax rate when you later on withdraw funds and also having your money locked up for decades. I'm curious if anyone out there has bypassed 401K investing and instead went with a taxable brokerage account with the investments of choice for retirement as an alternative? Its tempting to go this route - lower expense ratios, funds of choice, cheaper tax rate upon withdrawal.

I currently max out my 401K and am aware of its benefits but i'm just curious if anyone went the other way with a taxable account for retirement?
Thanks.
I max out my 401K... I also have a brokerage account earmarked for "retirement" to supplement what is going into the 401K... I like the tax benefits of the 401K now... and doing both should provide flexibility later on.

dskillz1
Posts: 147
Joined: Sat Feb 07, 2015 10:41 pm

Re: 401K vs Taxable Brokerage Account

Post by dskillz1 » Tue Sep 11, 2018 4:27 pm

Lets look at it from this hypothetical perspective- If I invested $18500 in the same mutual fund in both a taxable account and a 401K for 30 years would one be higher than the other assuming no 401k match?

tmcc
Posts: 150
Joined: Tue Feb 06, 2018 6:38 pm

Re: 401K vs Taxable Brokerage Account

Post by tmcc » Tue Sep 11, 2018 6:10 pm

depends on future tax rate and liquidity needs, doesnt it?

the short answer is that if you have to pick, its 401k.

if you don't have to pick then the Q is moot.

krafty81
Posts: 74
Joined: Thu Jul 05, 2018 2:01 pm
Location: San Diego, CA

Re: 401K vs Taxable Brokerage Account

Post by krafty81 » Tue Sep 11, 2018 6:36 pm

Why would you skip the match on 401k?

bradinsky
Posts: 24
Joined: Sat Jul 21, 2018 6:32 am

Re: 401K vs Taxable Brokerage Account

Post by bradinsky » Tue Sep 11, 2018 7:31 pm

krafty81 wrote:
Tue Sep 11, 2018 6:36 pm
Why would you skip the match on 401k?
Seriously! At least participate in the 401k to the point where you would receive the employer match. That’s a 100% return on the employee’s investment to start. I believe it’s a no-brainer.
Last edited by bradinsky on Tue Sep 11, 2018 7:34 pm, edited 1 time in total.

ljohnl
Posts: 10
Joined: Wed Aug 29, 2018 9:01 am

Re: 401K vs Taxable Brokerage Account

Post by ljohnl » Tue Sep 11, 2018 7:33 pm

delete please
Last edited by ljohnl on Sun Oct 07, 2018 11:47 am, edited 1 time in total.

ThriftyPhD
Posts: 720
Joined: Mon Jul 31, 2017 10:43 am

Re: 401K vs Taxable Brokerage Account

Post by ThriftyPhD » Tue Sep 11, 2018 7:37 pm

dskillz1 wrote:
Tue Sep 11, 2018 4:27 pm
Lets look at it from this hypothetical perspective- If I invested $18500 in the same mutual fund in both a taxable account and a 401K for 30 years would one be higher than the other assuming no 401k match?
The 401k would be higher. The taxable would have tax due every year from the dividend. Plus, if you put it into a Roth 401k, the withdrawal from the 401k would be tax free while you would have to pay capital gains on the taxable.

If you use a pre tax 401k, then you can't compare $18.5k vs $18.5k. The money would be going in tax free to the 401k. So it would be $18.5k in pre tax 401k vs $12,950 in taxable if you're 30% marginal fed+state. Then you have tax drag for 30 years on that taxable. Then in retirement, you might be at a lower tax rate so pay less than 30% when taking out of the 401k.

Dottie57
Posts: 4621
Joined: Thu May 19, 2016 5:43 pm

Re: 401K vs Taxable Brokerage Account

Post by Dottie57 » Tue Sep 11, 2018 7:41 pm

I liked 401k. It made investing easier to start. You can see that X% into 401k is less than X% from your paycheck.

As income grows it is great to defer those taxes. Your 401k contributions affect your highest tax rate. When you take money out it fills lower tax brackets before higher.

If you have more money then do Roth IRA. And after that do taxable.

MotoTrojan
Posts: 2460
Joined: Wed Feb 01, 2017 8:39 pm

Re: 401K vs Taxable Brokerage Account

Post by MotoTrojan » Tue Sep 11, 2018 7:45 pm

dskillz1 wrote:
Tue Sep 11, 2018 4:27 pm
Lets look at it from this hypothetical perspective- If I invested $18500 in the same mutual fund in both a taxable account and a 401K for 30 years would one be higher than the other assuming no 401k match?
This isn’t Apples to Apples. $18500 invested in a 401K would only cost me about $12,000 of take home pay. There are not many arguments for investing in taxable instead unless you were making peanuts and paid no tax on income.

User avatar
FiveK
Posts: 5708
Joined: Sun Mar 16, 2014 2:43 pm

Re: 401K vs Taxable Brokerage Account

Post by FiveK » Wed Sep 12, 2018 1:41 am

dskillz1 wrote:
Tue Sep 11, 2018 4:27 pm
Lets look at it from this hypothetical perspective- If I invested $18500 in the same mutual fund in both a taxable account and a 401K for 30 years would one be higher than the other assuming no 401k match?
If the fees in the 401k are the same as in the taxable account, then
- a Roth 401k is guaranteed to be better than or equal to a taxable account, and only equal if no taxes are ever paid on the taxable account.
- a traditional 401k may be better, equal to, or worse than a Roth 401k, depending on the marginal rates at contribution and withdrawal.

Thus, if a traditional 401k will be better than a Roth 401k, the traditional 401k will be better than a taxable account. Only if a traditional 401k would be worse than a Roth 401k is there a chance that taxable will be a traditional 401k.

The higher the 401k fees vs. taxable fees, the greater the chance that taxable will be better.

See the '401k vs Taxable' tab in the personal finance toolbox spreadsheet if you'd like to explore various "what if...?" scenarios.

User avatar
teen persuasion
Posts: 626
Joined: Sun Oct 25, 2015 1:43 pm

Re: 401K vs Taxable Brokerage Account

Post by teen persuasion » Wed Sep 12, 2018 8:59 am

ThriftyPhD wrote:
Tue Sep 11, 2018 7:37 pm
dskillz1 wrote:
Tue Sep 11, 2018 4:27 pm
Lets look at it from this hypothetical perspective- If I invested $18500 in the same mutual fund in both a taxable account and a 401K for 30 years would one be higher than the other assuming no 401k match?
The 401k would be higher. The taxable would have tax due every year from the dividend. Plus, if you put it into a Roth 401k, the withdrawal from the 401k would be tax free while you would have to pay capital gains on the taxable.

If you use a pre tax 401k, then you can't compare $18.5k vs $18.5k. The money would be going in tax free to the 401k. So it would be $18.5k in pre tax 401k vs $12,950 in taxable if you're 30% marginal fed+state. Then you have tax drag for 30 years on that taxable. Then in retirement, you might be at a lower tax rate so pay less than 30% when taking out of the 401k.
The flip side is that if you actually invest $18.5k in each, you have extra tax savings in the trad 401k scenario.

Just a few years ago, we had 5 kids at home, so we were in the zero federal tax bracket with all those exemptions. We still contributed to traditional rather than Roth, because of the effect on refundable credits. The EITC phaseout rate is 21%, and our state matches at 30% (another 6.3%), and we avoided state tax of 4%, for a total increase of 31.3%. It was enough to fund a Roth IRA (and other refundable credits enough for the other Roth IRA). So we had greater total savings using the 401k rather than taxable.

As the kids were approaching college age then, too, balances in retirement accounts were preferred over balances in taxable for FAFSA purposes. Retirement accounts are not included in available assets on the FAFSA, but taxable assets are included at 12% (and then a progressive rate is applied to the total of available income and available assets, max = 47%).

eli80
Posts: 27
Joined: Thu Dec 08, 2016 10:49 am

Re: 401K vs Taxable Brokerage Account

Post by eli80 » Wed Sep 12, 2018 9:10 am

Matching funds aside, if the growth rate in the 401k and the taxable are the same and the marginal tax rate when the money is deposited in the 401k is the same as when the funds are withdrawn - the math says it does not make a difference.

At almost 60 and starting to look at withdrawing from tax advantage funds, I am wishing I did not put as much in those types of accounts. It is good to have a combination of tax advantaged, taxable and Roth.

User avatar
ruralavalon
Posts: 14061
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: 401K vs Taxable Brokerage Account

Post by ruralavalon » Wed Sep 12, 2018 9:37 am

dskillz1 wrote:
Tue Sep 11, 2018 4:18 pm
Been reading a lot about the downside of the 401K most notably paying the normal tax rate when you later on withdraw funds and also having your money locked up for decades. I'm curious if anyone out there has bypassed 401K investing and instead went with a taxable brokerage account with the investments of choice for retirement as an alternative? Its tempting to go this route - lower expense ratios, funds of choice, cheaper tax rate upon withdrawal.

I currently max out my 401K and am aware of its benefits but i'm just curious if anyone went the other way with a taxable account for retirement?
Thanks.
No, contributions to my 401k were always the first investing priority.

We are in a lower tax bracket in retirement, so getting the tax deduction during my working years a was a good decision.

Don't pass up the tax deduction for traditional contributions to your 401k unless it's probable that your tax bracket in retirement will be higher than currently.

This assumes that there is at least one decent, useable fund offered in your 401k.
Last edited by ruralavalon on Wed Sep 12, 2018 9:56 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

User avatar
goingup
Posts: 3251
Joined: Tue Jan 26, 2010 1:02 pm

Re: 401K vs Taxable Brokerage Account

Post by goingup » Wed Sep 12, 2018 9:49 am

dskillz1 wrote:
Tue Sep 11, 2018 4:18 pm
...and also having your money locked up for decades.
That is one of the best features of a workplace savings plan! The money is in the vault, safe (relatively) from being used for things other than retirement. Automated savings, compounded growth, tax-deferment. All good.

Of course, a taxable account dedicated to retirement savings is great, too. It's more accessible, which can be a good and bad thing. If you're lucky enough to be a high-earner and good saver you'll have a robust 401K balance, along with a solid taxable account. Fill the 401K first. :beer

User avatar
UpsetRaptor
Posts: 229
Joined: Tue Jan 19, 2016 5:15 pm

Re: 401K vs Taxable Brokerage Account

Post by UpsetRaptor » Wed Sep 12, 2018 10:07 am

dskillz1 wrote:
Tue Sep 11, 2018 4:27 pm
If I invested $18500 in the same mutual fund in both a taxable account and a 401K
You already made a math error. See it? (Hint: What's your marginal tax rate?)

dskillz1
Posts: 147
Joined: Sat Feb 07, 2015 10:41 pm

Re: 401K vs Taxable Brokerage Account

Post by dskillz1 » Thu Sep 13, 2018 12:50 pm

Well lets say it was the exact same investment but in the 401K the expense ratio was .89 and in the taxable account it was .15?
Would the math still work out better for the 401K assuming the same amount was dollar cost averaged over the years?

User avatar
FiveK
Posts: 5708
Joined: Sun Mar 16, 2014 2:43 pm

Re: 401K vs Taxable Brokerage Account

Post by FiveK » Thu Sep 13, 2018 12:58 pm

dskillz1 wrote:
Thu Sep 13, 2018 12:50 pm
Well lets say it was the exact same investment but in the 401K the expense ratio was .89 and in the taxable account it was .15?
Would the math still work out better for the 401K assuming the same amount was dollar cost averaged over the years?
What answer do you get from the spreadsheet linked previously?

Post Reply