Is it worth bypassing a 401k in favor of a normal taxable investing account if you can contribute while in the 15% tax bracket and plan to retire in that bracket as well?

After crunching some numbers, it really doesn't matter if you pay the taxes now or later with a 401k unless you are going into a lower bracket.

My assumptions (or things to do before attempting this)

  • Contributed to a 401k to bring down taxable income to 15% if not there already
  • Have already maxed out a Roth
  • Highly likely to retire into this bracket (which seems very reasonable without a mortgage)

Another possible quirk with this is that it also depends on capital gains being 0% when withdrawing in the 15% bracket. This is what I believe the law currently is, please correct me if I am wrong.

If I am looking at this properly it looks like a very good opportunity to have easier access to your money as well as cheaper investing options.

Are there any flaws in how I am looking at this?

  • Does the 401(k) offer a match? If so, how much? Commented Jun 6, 2013 at 0:30
  • None, but I am contributing ~15% of my gross to my 401k, so not sure if it really matters.
    – radix07
    Commented Jun 6, 2013 at 2:18
  • Yes it would matter. If they were to give you 6% on top of your 15% you would start with a 40% gain on day one. Commented Jun 6, 2013 at 3:33
  • It obviously changes how much money I get, but it doesn't affect the overall strategy.
    – radix07
    Commented Jun 6, 2013 at 15:49

5 Answers 5


There are a couple of cases where I'd argue in favor of the 401k:

  1. Employer matching - If the employer matches your contributions, then it makes sense to get these additional investments which if you are in a low bracket may exist as highly-compensated employees may want those in the lower brackets to contribute as much as they can.

  2. Investment options - If the employer has enough assets in the plan, there could be access to institutional versions of those funds. For example, compare Vanguard Institutional Index Instl Pl (VIIIX) with Vanguard 500 Index Inv (VFINX), where the expense ratio in the former is just .02% while the latter is .17%. Granted this is a minor difference in expenses, there is something to be said for how much a .15% drag year over year could add up.

  • Very good points, although my employer offers neither any sort of match or low cost options.
    – radix07
    Commented Jun 6, 2013 at 2:17
  • +1 even though in hindsight, neither apply to OP. My own 401(k) sports an S&P fund with a .06% expense, and first 6% of income is matched 100%. The exact opposite of what OP has, unfortunately. Commented Jun 6, 2013 at 16:39

With no match, the traditional 401(k) for someone otherwise in the 15% bracket makes little sense. I'd suggest contributing just enough if you were in the 25% bracket to be in the taxable 15% but no more. Use a Roth IRA if you are saving more than that.

I'm adding this based on OP's statement that the fees on the 401(k) range .8-1.4%. I wrote an article Are you 401(k)o’ed? in which I discuss how fees of this range negate the benefit of the mantra "save at 25% to withdraw at 15%" and if one were in the 15% bracket to start, this level off fee will cost you money in no time at all.

The people advising you to max out the 401(k) first, given the rest of your situation and that of the account, are misguided. I'd given them the benefit of the doubt and assume they don't have all the details.

And with all due respect to the other posters here, everyone of them a bright, valued colleague, your answers should be addressed to the OP's exact situation. 15% bracket, no match, high fees. I suspect some of answers will change on reviewing this.

  • That's kinda what I thought, but when bringing this concept up elsewhere, people go a little crazy when you mention using a non-tax advantaged account without maxing a 401k.
    – radix07
    Commented Jun 6, 2013 at 15:42
  • I'll ask one more important question - what is the expense within the 401(k) account? I know, not all choices of investment are the same, but there's usually a tight range. .1%? .5%? more? Commented Jun 6, 2013 at 15:59
  • More like .8-1.4% for me. Which is not impressive at all, but long term hopefully I can moves those out to my own IRA.
    – radix07
    Commented Jun 6, 2013 at 16:03
  • Edited my answer above to discuss further. Commented Jun 6, 2013 at 16:29
  • Thank you for the update, I get a little nervous sometimes when I consider going against some of the financial gospel advice. Can be hard to find an answer based on the real situation and numbers over just what everyone says you should do.
    – radix07
    Commented Jun 6, 2013 at 16:57

The 401(k) has the advantage that you don't pay any tax until you take it out. That lets the gains multiple.

Two examples:

  1. If any of your stocks pay dividends, these are directly taxable if you don't have a 401(k). In the 401(k), the full dividends accumulate and are reinvested.

  2. If you sell any stocks and get capital gains, they are also directly taxable in a normal account.

Having said that, if you don't get any match, I would consider doing a 50/50; put half of your money in the 401(k), in something simple like an index fund, and invest the rest. That's assuming you have an index fund available in your 401(k).

  • 1
    Good points on being careful about distributions and capital gains. But compared to a tax efficient investment, the gains in a 401k don't compound any more favorably just because the taxes are deferred. The principle amount may be higher in 401k, but the take home amount is the same regardless of when it's taxed.
    – radix07
    Commented Jun 6, 2013 at 16:51
  • @Eric - a 15%er's Cap Gains and Dividends are taxed at 0%. Ignoring all the other issues, this one points to saving outside of the 401(k). Why turn a 0% tax into ordinary income at retirement? Commented Jun 6, 2013 at 18:45
  • This only applies to the Traditional 401(k). Roth 401(k) would be different. However, assuming the same tax rate now and later, there is no difference in what you get from a Traditional 401(k) and Roth 401(k). So the notion that "that you don't pay any tax until you take it out. That lets the gains multiple." is an inherent "advantage" is wrong.
    – user102008
    Commented Jun 11, 2013 at 1:00

easier access to your money

That can be a disadvantage for some people. Based on the number of people who tap their 401K for non-retirement reasons, or just cash it in when they change jobs; making it painful to use before retirement age does keep some people from spending it too early.

They need to be able to compartmentalize the funds in order to understand the difference between funds spending, saving and investing for retirement.

Roth 401K

One advantage that the 401K may have is that you can in many plans invest the funds in a Roth 401K. This allows you to go beyond the Roth IRA limits. You are currently investing the maximum amount in your Roth IRA, so this could be a big advantage.

  • According to the OP, they will contribute and retire in the same tax rate. The Roth 401(k) produces the exact same result (actually, slightly worse if most of the income in retirement comes from 401(k)) as the Traditional 401(k).
    – user102008
    Commented Jun 11, 2013 at 1:02

You hit on the biggest advantage of keeping things out of tax-advantaged accounts: Easier access to the money.

It hurts to take money out of a 401(k) early. It may hurt more in the future. (Do you think the reason the 10% penalty is there in order to protect you from yourself?) It also may be converted into a vehicle besides what you have it in now, due to a "national liquidity crisis."

You have plenty in tax-advantaged accounts, IMO.

  • There's no fresh light in what you're saying. You're trying to scare people by telling them things than are not true.
    – littleadv
    Commented Jun 6, 2013 at 5:05
  • Littleadv, I get push-back on this all the time. I haven't changed my tune for quite a while. But when I continue to see such a uniform, unswerving adoration of tax-advantaged accounts by people "in the know," I get more and more nervous that, one day, we're all going to wake up and be blindsided, and every CFP out there will swear on a stack of whatever that they didn't see it coming. I hope it doesn't happen, but I can't dismiss it. I won't dismiss it.
    – mbhunter
    Commented Jun 6, 2013 at 5:28
  • I love @mbhunter but disagree with any conspiracy theory promotion. Commented Jun 6, 2013 at 15:58

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