Are Traditional 401(k) Plans Obsolete?

Jonathan Henkels |

Given the new tax rules and rates, it may be time to reconsider your retirement plan options

There are many financial rules of them (don’t spend more than you earn, save 20% of your income, etc.) with one of big ones being to put money away in a pre-tax 401(k) if your work offers one.  The main incentive to do so is that these accounts have tax advantages – some of your earnings go in tax free, it grows tax free, and you then pay taxes later when you take withdrawals at hopefully a lower rate.

But this advice may be a bit outdated now.  If we compare some key rates and numbers from 1980 to today, there is a stark difference in tax rates.  Here is a table showing them for a median-income married couple with two children:


Marginal Federal Tax Rate

Capital Gains Tax Rate

Likely Retirement Bracket Tax Rate









In 1980, there was a significant difference between your marginal federal tax rate while working and what you could expect your rate to be in retirement, so it made sense to defer paying taxes on that income as long as you could.  Today, if you fall in the median, you don’t have any tax savings – it’s 12% now or 12% later.

Also, notice that the capital gains tax today is 0% if you are in the 12% bracket, so there isn’t any tax to avoid on those gains in 2020 by putting the money into a tax advantaged account like a 401(k).  One might say that the employer match is a benefit that would be foolish to turn down, but many people just increase their 401(k) contributions when they want to save more for retirement when there aren’t nearly as many benefits to do so compared to 1980.

If this is the new reality of 401(k) plans, then it may be worth taking a look and seeing if there are other tax advantaged plans or savings strategies that may make sense for you to utilize.  At Phase 3, we customize and tailor plans to suit your needs, goals, and financial lives.  Let us take a look at your situation to see if you should keep funding your 401(k), evaluate your contributions, and see if there are better strategies for you.