TL;DR conventional wisdom (e.g., this pinned post on the MMM forum

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153) is that you should always max out your 401k before investing in a taxable account.

However, it looks like folks whose annual spending falls within the lowest long term capital gains tax bracket (currently $40,400 or less) can retire faster if they don't contribute to a 401k at all due to the income taxes they'll incur on their 401k distributions - even if they receive a generous $10k/yr employer 401k match and live in a low tax state like Texas.

Am I crazy, or should MMM have an article to warn folks that they might not want to contribute to their 401k if they plan to be in the lowest long term capital gains tax bracket during early retirement?

Here's a detailed example to illustrate why some people might not want to contribute to their 401ks:

My friend (let's call her Samantha) makes $123k/yr before taxes and lives on $40k/yr in Texas.

Using the "Retirement Savings vs. Years" calculator linked in this Mr Money Mustache post (

https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/), Samantha has determined she needs to work around 14 more years at her current salary to accumulate a ‘stache of $1M, which will allow her to withdraw around $40k/yr (adjusted for inflation) for the rest of her life to cover her expenses.

If Samantha pays for all her expenses in retirement using long term capital gains and dividends, she will be in the $0 to $40,400 tax bracket (

https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates) and owe $0 tax on her investment income in retirement.

Samantha has the option to contribute to an employer-sponsored 401k plan that pays a generous $10k/year match. She knows that even if she locks up money in her 401k to get the match, she can access it penalty-free before age 59.5 using a Roth IRA conversion ladder, provided she rolls over any money she needs to spend before turning 59.5 at least 5 years before she needs to spend it.

If Samantha maxes out her 401k each year, in 14 years she will have saved an additional $165,219 vs. if she contributed nothing to her 401k (this includes her $10k/yr employer match and assumes 5% investment returns after inflation). Maxing out her 401k should be a no brainer, right?

However…

When Samantha wants to access the money in her 401k - whether by rolling over the funds into her Roth IRA via the conversion ladder strategy, or by making traditional penalty-free distributions after age 59.5 - she will have to pay income tax,

**not long term capital gains tax,** on the money she withdraws.

Put another way, if Samantha never withdraws money from a 401k and lives on $40k/yr exclusively from the long term capital gains and dividends in her taxable account, she won’t owe another dollar of income or capital gains tax in her life.

However, if Samantha has to withdraw some of her money from her 401k, she will owe income tax every year she makes a 401k withdrawal. She will need to withdraw $47,660 (~20% more) from her 401k each year before taxes to end up with the same amount of money she would have in her pocket if she withdrew just $40k/yr tax-free from her taxable account.

Because of the unavoidable taxes on 401k distributions, it seems like Samantha’s ‘stache would have to be almost 20% larger to allow her to retire in 14 years if she contributes to a 401k vs. if she doesn’t. Specifically, if Samantha follows the Roth conversion ladder strategy and rolls over $47,660 each year (in order to provide her with $40k after taxes 5 years later), she will need a ‘stache of $1,191,500 to retire in 14 years. This is

**more than** the $1,165,219 she will have saved if she maxes out her 401k.

Samantha’s net worth will be over $165k higher 14 years from now if she maxes out her 401k…but is it really worth it if she has to delay her retirement due to the higher tax obligations she will have on 401k withdrawals vs. on long term capital gains and dividends from her taxable account?

I ran similar calculations in different scenarios (screenshots attached), and it seems like Samantha would be able to retire earlier if she doesn't contribute

**anything** to a 401k regardless of how much she contributes. i.e.:

- if Samantha maxes out her 401k and receives a $10k/yr match, her retirement will be delayed by ~5 months vs. if she contributes nothing to her 401k

- if she only contributes $10k/yr to her 401k (the minimum amount needed to receive the match), her retirement will be delayed by ~2 years

- if she maxes out her 401k and doesn’t receive a match, her retirement will be delayed by ~3 years

Am I crazy, or would Samantha be better off not contributing

**at all** to her 401k and foregoing her company’s $10k/yr match if:

- her goal is to retire in 14 years or less, and
- she plans to keep her annual spending below the lowest long term capital gains tax threshold of $40,400/yr?

Maybe delaying retirement by ~5 months in the best case scenario above feels negligible for some folks, but I feel like contributing to a 401k should at least let you retire earlier to compensate for the (potentially) decades of slightly more administration and complexity in your finances you will commit to if you follow the Roth conversion ladder strategy.

Please let me know if you think my reasoning is incorrect. Thanks a lot for reading for anyone who made it to the end!

Resources used in my calculations: