Since the beginning of 401(k) plans in 1978, people have considered it to be the quintessential retirement plan—you get to save money before taxes and in most cases, the company puts money into your account, too. What could be better than that? But now, 44 years later, it’s time to take a broader look at 401(k)s that considers taxes on 401(k) distributions.

401(k)s certainly have a place in your investment plan. Most employers offer some kind of match up to a certain level. It just makes sense to contribute enough of your money to receive everything the company is willing to contribute on your behalf. It’s free money. To quote an age-old axiom, don’t leave money on the table.

But once you’ve contributed enough to get the entire company match, does it make sense to max-out your 401(k) contributions, which in 2022 is $20,500, or if you are 50 or above, $27,000.

It’s estimated that in retirement you’ll need approximately 80% of your pre-retirement income because:

Without all those expenses, lower income may put you in a lower tax bracket. But withdrawals from 401(k) plans are fully taxable as ordinary income. So, if most of your retirement income comes from 401(k) distributions, most of your retirement income will be taxable as ordinary income.

2022 Tax Brackets for Single Filers, Married Couples Filing Jointly

Tax Rate For Single Filers For Married Filing Jointly For Heads of Households
10% $0 to $10,275 $0 to $20,550 $0 to $14,650
12% $10,275 to $41,775 $20,550 to $83,550 $14,650 to $55,900
22% $41,775 to $89,075 $83,550 to $178,150 $55,900 to $89,050
24% $89,075 to $170,050 $178,150 to $340,100 $89,050 to $170,050
32% $170,050 to $215,950 $340,100 to $431,900 $170,050 to $215,950
35% $215,950 to $539,900 $431,900 to $647,850 $215,950 to $539,900
37% $539,900 or more $647,850 or more $539,900 or more
Source: Internal Revenue Service

But what would happen if you contributed enough to your 401(k) to get the company match, and invested the rest into a taxable account? Yes, you’d pay taxes on that money now. But as you liquidate the taxable investments during retirement, you’d be paying capital gains taxes rather than ordinary income taxes.

2022 Tax Rates for Long-Term Capital Gains

Source: Internal Revenue Service

You can see from the income tax chart that in 2022, if you are married filing jointly and your income is between $83,550 and $178,150 your marginal ordinary income tax rate is 22%. But the long-term capital gains rate for someone in that same income range is 15%. That’s a substantial difference.

For people making higher incomes, the difference is even more dramatic. If you’re married filing jointly with income between $340,100 and $431,900, the marginal ordinary income tax bracket is 32%, while the long-term capital gains rate is 15%.

Next, what would happen if you took retirement money above the amount needed to get the company match and invested it in a Roth IRA? Just like putting money into a taxable account, you’ll pay income taxes on those contributions, which in 2022 can be $6,000 or $7,000 for people 50 and above. You can withdraw your contributions, tax-free, at any time, and once you reach the age of 59 ½, all the earnings from your contributions can be withdrawn tax-free.

What if you took retirement money above the amount needed to get the company match and invested it in municipal bonds? Just like the previous examples, you’ll pay income taxes on the amount you put into the bonds, but the interest is free from federal taxes, and if the municipal bond is issued by a government entity in the state where you live, you may not have to pay state income taxes on the interest.

Other considerations about whether to put additional money into a 401(k) include:

Other reasons not to max out your 401(k) that are not tax-related:

When you’re working, the bulk of your income is from your job and is fully taxable (after deductions and exemptions) at ordinary income tax rates. When you’re retired, you pay ordinary income taxes on:

If you have investment income, you pay taxes on:

Should you max out your 401(k) plan? Do some planning to see what’s best for you.

This article is presented as information only and should not be considered tax, legal or financial advice.

Over the weekend, Bitcoin tumbled again. Reaching an ultra-ugly low of $17,641 (before retracing back above $20k), even the self-styled premier digital “store of value” has thrown in the towel. As I wrote last week, winter isn’t coming it is here.


If the March gasoline/oil spike hit a weak global economy really hard and caused what more and more looks like a recessionary shock, a(n un)healthy part of it was the acceleration of Euro$ #5 concurrently rippling through the global reserve system.

May 2022’s payroll estimates weren’t quite the level of downshift President Phillips had warned about, though that’s increasingly likely just a matter of time. In fact, despite the headline Establishment Survey monthly change being slightly better than expected, it and even more so the other employment data all still show an unmistakable slowdown in the labor market.

Stocks had a rip snorter of a rally last week and a lot of people are pondering the question in the title over this long weekend. The S&P 500 was down 20.9% from intraday high (4818.62, January 4th) to intraday low (3810.32, May 20th). From that intraday low the market has risen 9.1% in just six trading days.

If it continues to play out the same way, it would be all the worst scenarios lumped together all at the same time. A real unfortunate convergence, yet one that has been entirely predictable. Consumers reaching their absolute spending limits.

We always have to keep in mind that the major economic accounts perform poorly during inflections. Europe in early 2018, for example, was supposed to have been just booming only to have run right into the brick wall that was Euro$ #4.

There’s an old Wall Street maxim that the cure for high commodity prices is high commodity prices. As prices rise two things will generally limit the scope of the increase. Demand will wane as consumers just use less or find substitutes. Supply will also increase as the companies that extract these raw materials open new mines, grow more crops or drill new wells.

It should be as simple as it sounds. Lower LT UST yields, less growth and inflation. Thus, higher LT UST yields, more growth and inflation. Right? If nominal levels are all there is to it, then simplicity rules the interpretation. Visiting with George Gammon last week, he confessed to committing this sin of omission.

This content was originally published here.

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