Have you outgrown your 401(k) or similar retirement plans?

With experience comes new perspectives.

Life insurance agents promoting tax-free (or in my opinion 'tax-exempt') retirement strategies love to malign the 401(k) plan as one of the biggest tax traps one can get into.

I am, and have been, one of them with plenty of articles on this blog to back it up.

The thought process is the idea that knowing what you now know, would you have gotten into this arrangement with the government for your retirement?

But frankly, that's often an unfair judgment on ourselves.

1. As human beings, we only do the best we can with the knowledge we have at the time we make our decisions.

It's far better to have money somewhere... than nowhere.

It may not get us what we originally THOUGHT it would do for us, but better to have that regret, than the regret of not starting anything.

2. Unless we are part of what is often called "the lucky sperm club", do we really know the trajectory of our lives?

So, instead of 'shaming' others for starting a retirement plan with the information they had at the time... what if we merely suggest that they may have 'outgrown' their 401(k) plan?

Outgrowing simply means that it was, for a period of time, the most appropriate thing and action we took to secure our financial future... but as our skills, income, and wealth has grown, it is no longer the best way to accomplish our retirement goals and business building objectives.

After all, would someone just getting started at a new job... would they be on the radar of most financial professionals to begin an individualized financial plan?

Probably not.

But as they have grown, and grew into more influential circles, they are now in front of us... and we 'demonize' that they did something that would cause them harm later?

3. There is a point where tax-exempt retirement doesn't make mathematical sense in the tax code.

As I write this in 2025, we have 7 federal tax brackets:

10%, 12%, 22%, 24%, 32%, 35%, and 37%.

The biggest jump is from the 12% to 22%.

Let's look at the 2025 tax tables for Married Filing Jointly:

When your income from qualified retirement plans is between $23,850 and $96,950, your taxes are (currently) only 12% for $2,385. (I'm not including any deductions, credits or anything else.)

When your income is between $96,950 and $206,700, your taxes are (currently) $11,157 above the prior bracket ($2,385) for a total tax bill of $13,542.

Of course, it gets worse with higher income... and especially if you're single.

But $11,157 is 4.67 TIMES the amount of the previous bracket (at maximum amounts)! No other bracket jump is nearly as steep as the 12% to 22% jump at the maximum income.

We have to ask the prudent question:

Assuming the current tax code, if you can retire in the 12% tax bracket of income, including your Social Security retirement benefits... does it make sense to do tax-exempt retirement income?

Probably not.

I'm finding in my own calculations that the breakpoint for where it mathematically makes sense to do this kind of planning... is at the $500,000 in IRS qualified retirement plans. If that kind of income planning is done, it often greatly reduces the total cash flow in retirement and that would be a negative outcome.

With some of today's annuity income contracts, they can create wonderful income guarantees... despite them being fully taxable in most cases.

It's not a bad thing to begin contributing to a 401(k).

It may just be a negative thing if you keep your long-term wealth there.

Which means there may be a point when someone "outgrows" their 401(k). It takes a bit of analysis, but whether to begin the systematic conversion of withdrawals to other plans or not... must start with that analysis.

Will the tax code greatly affect those currently in the 12% tax bracket?

We know that the tax code is always changing. The 12% bracket used to be 15% before the Trump Tax Cuts and Jobs Act was passed.

It may take some slight adjustments, but with the way things have been heading, I doubt that either political party is looking to increase taxes on those earning less than $100,000 a year, particularly a married couple. That's just an opinion and I'm allowed to be wrong over time.

I may 'lead' with tax-exempt retirement and wealth planning, but that doesn't mean that's ALL I do. I offer the right solutions for the client at the time based on my education and knowledge.