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If you are capped at 28% for deductions but it comes out taxed in retirement at the highest rate (let's assume that 39%), then you are actually penalized for saving money in a 401k at that level. You would have been better off paying the taxes immediately and instead invest outside of the 401k for more favorable tax treatment on any gains and dividends.

Hmm, I'll have to think about it. Thing is, all of it doesn't come out taxed at 39%. All the money below the top bracket is getting taxed at lower marginal rates. Not sure if that pencils out or not. Perhaps for extremely high withdrawals.

However, I think your example would apply at most to a very tiny number of people. Someone who has an SWR of over $400,000/year in retirement would have an mindblowingly large 401k. Not many people like that. and reasonable to assume someone with that much money doesn't need help to save for retirement.
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