The Average 401(k) at 65 Is $258,800. The IRS Owns a Slice of Every Dollar. These 3 ETFs Build the Part It Can’t Touch

You spent three or four decades contributing to a traditional 401(k), and Fidelity’s Q1 2026 data, drawn from 26,800 corporate defined contribution plans covering 25.6 million participants, puts the average balance for savers ages 65 to 69 at $258,800. That money received favorable tax treatment while you were working, but withdrawals from a traditional 401(k) are generally taxed as ordinary income. For married couples filing jointly in 2026, taxable income above $100,800 enters the 22% federal bracket, while income above $211,400 enters the 24% bracket.

The $258,800 average tells only part of the story. Empower’s October 2026 data puts the median 401(k) balance for people in their 60s at roughly $189,745, well below that average, because a smaller cohort of high-balance accounts pulls the mean upward. Whether your balance sits above or below either figure, the tax structure is the same: a substantial portion of that money belongs to the IRS the moment withdrawals begin.

That reality makes tax diversification a serious part of retirement planning. Building assets alongside a traditional 401(k) can open access to long-term capital-gains treatment, qualified dividends, and federally tax-exempt municipal-bond income. Three ETFs can play distinct roles in that strategy: Schwab U.S. Large-Cap Growth ETF (NYSEARCA:SCHG), iShares National Muni Bond ETF (NYSEARCA:MUB), and Vanguard S&P 500 ETF (NYSEARCA:VOO).

The Tax Problem Behind the $258,800 Number

The benefit embedded in a traditional 401(k) is deferred tax, not forgiven tax. When required minimum distributions start, the IRS collects on decades of compounding at whatever bracket applies that year. The fix requires action years before the first required withdrawal, which is exactly what our free guide on the first-year tax bomb walks through. A Roth IRA, a Roth 401(k), and a well-constructed taxable brokerage account can each sidestep some or all of that drag. The three ETFs below fit cleanly inside those wrappers and let compounding work in accounts where the IRS has far less authority.

SCHG: The Growth Engine for Your Roth

SCHG tracks the Dow Jones U.S. Large-Cap Growth Total Stock Market Index, and its top holdings read like a roster of the AI economy: NVIDIA leads at roughly 10.65% of assets, followed by Apple at about 10.40%, Microsoft near 6%, Amazon around 4.83%, and Alphabet rounding out the top five. Growth stocks pay small dividends by design, which is exactly the profile you want inside a Roth or a taxable account. Less annual income means less to tax currently, and the capital appreciation you eventually harvest inside a Roth comes out federally tax-free.

The fund now carries roughly $63.6 billion in assets and maintains its razor-thin 0.04% expense ratio, meaning about $996 of every $1,000 stays invested and working. Own it in a Roth account and the IRS collects none of the long-term gain.

MUB: Income the IRS Legally Cannot Touch

Municipal bond interest is exempt from federal income tax by statute. MUB packages more than $50 billion in investment-grade national munis into a single ticker at a 0.05% expense ratio. The fund pays monthly, and the trailing 12-month distribution totals roughly $3.42 per share. At a recent share price near $102, that works out to a tax-free trailing yield in the low-to-mid 3% range.

The competitive picture against Treasuries has shifted meaningfully. The 10-year Treasury yield has climbed to approximately 5.1% in October 2026, up sharply from levels earlier this year. A saver in the 24% bracket keeps only about 3.9% of that Treasury yield after federal tax, so MUB’s federally tax-exempt income remains competitive for many investors, particularly those in higher brackets where state tax exemptions add a further edge. Total return has been steady rather than spectacular, but for this role in a portfolio, steady is the point.

VOO: The Cheapest Way to Own America

VOO holds the full S&P 500 at a 0.03% expense ratio, which leaves $997 of every $1,000 compounding. The fund has grown to more than $1 trillion in assets, a milestone reflecting a decade-plus of investor confidence in low-cost passive indexing. Because index ETFs rarely distribute capital gains (thanks to their in-kind redemption structure), a VOO position held in a taxable brokerage account generates mainly qualified dividends. The trailing 12-month payout runs approximately $7.43 per share, taxed at the lower 15% or 20% long-term rate rather than as ordinary income. Over the past year the fund has returned about 16.5%, including dividends reinvested.

Place VOO inside a Roth IRA and the calculus changes further: every dollar of appreciation comes out federally tax-free after age 59½, with no annual tax drag on dividends along the way.

The Real Trade-Off

None of these funds come without trade-offs. Roth contributions use after-tax dollars, so a saver still in a peak-earning bracket faces a real upfront cost when converting or contributing. MUB’s tax-exempt yield looks smaller than a comparable taxable bond fund on the label, and the advantage narrows if your retirement bracket turns out to be lower than expected. SCHG’s mega-cap concentration cuts both ways: the same top names that drive the upside also drive the drawdowns, and the fund has historically fallen more than 30% from peak to trough in severe market dislocations.

For a retirement saver looking beyond the tax bill waiting inside that $258,800 traditional 401(k) balance, the combination of a tax-free growth sleeve, tax-exempt income, and a broad low-cost index core is one of the most straightforward structural defenses available.

Editor’s note: This update revises SCHG’s assets under management to approximately $63.6 billion (from $61 billion), updates MUB’s AUM to more than $50 billion and its share price to approximately $102, corrects the 10-year Treasury yield to approximately 5.1% (from 4.71%), raises VOO’s annual dividend figure to $7.43 per share, and adjusts VOO’s one-year return to approximately 16.5%. The top-five SCHG holdings have also been refreshed to reflect Alphabet displacing Broadcom in that position, and Empower’s October 2026 median 401(k) balance figure has been added for context.

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