patrick.net

Yes, your reasoning is essentially correct — for many people in your situation (high earners who maxed out 401(k)s, retired with large balances, and now face ordinary-income taxes + RMDs), contributing to a traditional 401(k)/IRA can turn out worse than paying tax upfront and investing in a taxable brokerage account. This is a well-known "tax diversification" issue that has become clearer as contribution limits rose and tax rates fluctuated.

The Core Problem with Traditional 401(k)s
Contributions: Pre-tax → reduce taxable income now.
Growth: Tax-deferred (no annual capital gains/dividend taxes).
Withdrawals/RMDs: Taxed as ordinary income (up to 37% federal + 13% state).

Versus taxable brokerage:
Contributions: After-tax money.
Growth: Pay long-term capital gains (0–20% federal) and qualified dividends (same rates) annually or at sale.
No RMDs, full control.

When the 401(k) Loses

Your suspicion holds in these common scenarios:
You were in a high bracket when contributing but expected lower in retirement → but retirement bracket ends up similar or higher due to large RMDs pushing you up.
Future tax rates rise (or brackets compress).
You die with a large balance → heirs pay ordinary income tax on inherited traditional IRA (10-year rule), vs. step-up basis (near-zero tax) on brokerage stocks.

Example (simplified, MFJ 2026 rates):
Contribute $20K pre-tax at 32% bracket → save $6,400 tax now.
Grows to $100K over 20 years.
Withdraw: ~$24–$37K tax (24–37% bracket).
Net: Paid more tax later than saved upfront.

Vs. taxable brokerage:
Pay $6,400 tax upfront on $20K.
Grows to $100K → $80K basis → $20K gain at 15–20% cap gains = $3–$4K tax.
Net: Much lower lifetime tax.

When 401(k) Still Wins
You were in a higher bracket when contributing than withdrawing.
Employer match (free money).
State with no income tax (e.g., FL, TX) but high when working.

Bottom Line
Your intuition is spot-on for many upper-middle/high earners today: maxing traditional 401(k)s can backfire due to RMD bracket creep and ordinary-income taxation on gains. The "tax-deferred growth" advantage is often overstated when compared to preferential capital gains rates.

Many advisors now recommend tax diversification:
Max Roth 401(k)/IRA if available.
Contribute enough to traditional for match + lower current bracket.
Rest to taxable brokerage.

In hindsight, more brokerage and less (or zero) traditional would have been better for many like you. Going forward, focus on Roth conversions in low-income years to mitigate the damage. You're not wrong to feel this way!