(This post is the 2nd in a series. Subsequent posts forthcoming… soon. See the first post: Is Your 401k Too Big?)

A Traditional 401k / IRA allows us to invest for the future in a tax advantaged way. However, in some cases these accounts can become tax disadvantageous due to sheer size.

When the IRS forces withdrawals after our 70 1/2 birthday (the RMD), large accounts may get hit with higher tax bills. Those taxes could even be greater than what we saved on contribution.

We already saw this in the first post in this series. Even account values at age 70 1/2 of $350k or more (Married Filing Jointly) would most likely fail to Never Pay Taxes Again. But this isn’t necessarily tax disadvantageous.

Due to tax savings on contributions, are there higher account values that can be reached before our 401k becomes too big? And if so, how do we evaluate additional contributions?

Is Your 401k Too Big?

Higher Account Thresholds

When making contributions to Traditional 401k/IRAs we get an immediate tax deduction at our current marginal tax rate. We come out ahead If withdrawals are taxed at a lower rate.

Using the same methodology that we used to determine account value thresholds that allow zero tax burden, we can find glide paths that coast under the RMD without crossing over the 10%, 12%, and 22% tax brackets.

Methodology reminder: we make regular annual withdrawals to the top of a tax bracket, assuming a range of forward CAGRs (cumulative annual growth rates.) State taxes and ACA subsidy reductions not included.

The following charts are for the 10%, 12%, and 22% tax brackets, with CAGRs from 4% – 9%. All 2018 numbers for Married Filing Jointly (Single filers divide by 2.) Scales are the same for easy comparison. For years after 2018, all numbers can be scaled; X = Current Year Standard Deduction / 2018 Standard Deduction.

From this chart we can see that account values of ~$650k at traditional retirement age could likely never pay more than 10% tax. This is about 2x the account values that allow paying no tax. With higher acceptable marginal tax rates the account values can be larger… as can be seen in the 12% and 22% charts that follow.

Using these charts we can find target 401k values to achieve our tax minimization goals. All raw data is here, in both chart and table format.

Example Scenario 1:

At age 60, if our 401k was heavy on stocks (assumed 7%+ real CAGR), and we had an arbitrary goal of never paying tax at a rate higher than 10%, we might struggle to meet that goal if our 401k value was greater than $600k. (Or $1400k at 12%, or $2600k at 22%.)

Example Scenario 2:

If throughout our accumulation phase we were earning at the 12% marginal rate, and now Traditional 401k/IRA values exceed $2 million at age 70, then will likely pay some tax at 22%+. Could be considered slightly tax disadvantageous.

Other Income and Credits

What about other income? Many “early retirees” have some rental properties, a pension, non-qualified dividends, interest, or accidental blogging income (basically anything that isn’t qualified dividends or long term capital gains.) And most people will have some amount of Social Security income. How does that factor into this?

The math is straightforward… albeit a bit messy the first time through.


Ordinary income: $43,050. This completely fills up the 0% and 10% tax brackets ($24,000 standard deduction, $19,050 10% bracket – 2018 numbers, MFJ)

Goal: max 12% tax rate
Target retirement age: 50
Allocation: 50/50 stock/bond (assume 6% CAGR)

Target 401k value at age 50 = Tax 12% 401k value @ 50 – Tax 10% 401k value @ 50 = 1630k – 692k = $938k
(Data here.)

For credits, we can choose to increase the size of IRA conversion / withdrawal. For example, if we have a Foreign Tax Credit of $600 from ownership of International Stock funds, we can convert/withdraw an additional $6,000 at 10% tax rate, $5,000 at 12% rate, etc…. Our target IRA size can be increased by ratio of increased withdrawal/tax bracket, e.g. 6,000/19,050 = 30%, 5,000/58,350 = 8.5%, etc…

Reevaluating Additional Contributions

This is all well and good, but how do we know if we are on trend to exceed certain disadvantageous levels?

It helps to look at a specific target return of return. I’ve chosen 7% real since that is the actual long term CAGR of the stock market since the beginning of time.

We saw in the first post in this series that any 401k/IRA values exceeding the Tax 0% Blue Line in the above chart will result in tax being paid.

Similarly, if values exceed the Tax 10% Orange Line, then taxes in excess of 10% will be paid at some point. Taxes in excess of 12% (Taxes 12% Gray Line) and 22% (Tax 22% Gold Line) will be required as values grow further.

We can use these thresholds to determine if additional contributions are warranted.


Age 50, 401k/IRA value = $1 million.

If Marginal rate on contribution is 22%, then there is definite value in more Traditional contributions.
If Marginal rate is 12%, then contributions to Roth or brokerage account would have better long term value.

Summary and Next Steps

In this, the second post in this series, we evaluated higher thresholds where 401ks can become tax disadvantageous, and how to evaluated if there is benefit to additional contributions. We also explored how to make adjustments for other income and tax credits.

Whereas account values of more than $250k will potentially struggle to achieve a lifetime 0% tax rate, our 401k can reach into the millions while still being advantageous to higher income earners.

All of the raw data in chart and table format is located here.

So far we’ve looked at things purely from a marginal rate perspective, and the analysis has been orderly and predictable. It even seems like we have some semblance of choice or control in the matter. In the next post… I’ll dissuade that delusion.

(This post is the 2nd in a series. Subsequent posts forthcoming… soon.)
(See the 1st post here.)

Are you tracking your 401k / IRA values?

We monitor our 401k/IRA values using free tools from Personal Capital (affiliate link).