An internist on a hospital W-2, age 60, $390,000 salary, $1.7 million sitting in a 401(k), four years from a planned retirement at 64. The conventional advice says to max the plan and ride it to 65. A growing cohort of physicians in exactly this situation is doing the opposite: taking in-service distributions the moment they cross 59.5, paying the tax upfront, and parking the proceeds in a regular taxable brokerage account.
The move looks irrational on its surface. Why pay 32% federal plus state today on money you could defer? That discomfort is precisely the point. Once you trace where the dollars actually end up at age 85, the numbers favor the taxable path.
Why the 401(k) Turns Into a Liability After 73 (or 75)
Every dollar left in a traditional 401(k) eventually exits as ordinary income. For a retired couple drawing Social Security, modest pension income, and RMDs on a seven-figure balance, the marginal federal bracket typically lands at 22% or 24%, not the 12% many planners assume. Add state tax, the provisional-income formula that makes 85% of Social Security taxable, and IRMAA premium surcharges on a two-year lookback, and the effective marginal rate on the next RMD dollar often clears 35%.
One critical detail for this cohort: under SECURE 2.0, anyone born in 1960 or later faces an RMD starting age of 75, not 73. Our 60-year-old internist, born around 1965, gets two extra years of deferral compared with older retirees. That sounds like a benefit. The catch is that the 401(k) balance compounds longer inside the tax-deferred wrapper, making the eventual forced distributions even larger and concentrating the tax bite into fewer, costlier years.
An in-service distribution is the escape hatch. IRS Publication 575 permits 401(k) plans to allow withdrawals after age 59.5 while the account holder is still employed. Plans are not required to offer this feature, so the plan’s Summary Plan Description is the first document to pull.
The Math on $80,000 a Year for Four Years
The core strategy is straightforward: pull $80,000 per year for four years between ages 60 and 63, paying a 32% blended federal rate. That moves $320,000 gross out of the plan and leaves about $200,000 net inside a taxable brokerage account.
Grow that $200,000 at 7% for 25 years and the brokerage account compounds to roughly $1.1 million. Future appreciation is taxed at 15% to 20% long-term capital gains rates when realized. Qualified dividends receive the same preferential treatment, and assets held at death receive a stepped-up cost basis that erases embedded gain for heirs.
Leave the same $320,000 inside the 401(k) and, at that same 7% growth rate, it becomes roughly $1.7 million. The larger headline number is the seduction. Every dollar that comes out becomes ordinary income taxed at 22% to 24% federal plus state, and a chunk must exit under RMD rules at 75 whether the account holder wants it or not.
Run the tax on growth across the full retirement horizon and the brokerage path saves roughly $80,000 to $140,000, before counting the IRMAA premium relief that follows from reporting lower income in retirement.
Why 2026 Is an Unusually Good Window
The 10-year Treasury yield climbed to approximately 4.57% in early July 2026, its highest level since mid-May, as oil prices surged on renewed Middle East tensions after a breakdown in ceasefire talks. The 30-year bond pushed back above 5% during the same stretch. A taxable brokerage holding intermediate or longer-duration Treasuries, or a direct-indexed equity sleeve, can capture those yields while generating loss-harvesting opportunities that a 401(k) wrapper forecloses entirely. Tax-deferred space wastes the tax alpha of direct indexing.
The broader rate picture remains unsettled. The Fed funds target range holds at 3.5% to 3.75%, a level unchanged since the June 17, 2026 FOMC meeting, the first under new Chair Kevin Warsh. That meeting removed prior language hinting at eventual easing and released projections showing nine of nineteen policymakers favoring at least one rate hike by year-end. As of early July, CME FedWatch data showed roughly a 70% probability the Fed holds at its July 29 meeting, but the trajectory beyond that points higher, not lower. Inflation remains well above the Fed’s 2% target, and the FOMC’s updated projections raised the 2026 headline PCE forecast to 3.6% and core PCE to 3.3%. Holding flexible, liquid assets outside an employer plan positions a retiree to adapt as both rates and costs shift.
The passage of the One Big Beautiful Bill Act, signed into law on July 4, 2025, adds a second planning dimension. The law permanently locked in the TCJA tax brackets, including the 22%, 24%, and 32% tiers, eliminating the prior uncertainty about a bracket sunset at the end of 2025. Retirees and near-retirees now have a stable, predictable rate structure for multi-year conversion and distribution planning. The law made no changes to RMD rules, Roth IRA rules, or 401(k) distribution mechanics, so the in-service distribution strategy discussed here remains fully intact.
How to Execute the In-Service Distribution
- Pull the plan’s Summary Plan Description and confirm in-service distributions are permitted after 59.5. If the plan restricts the source to employer-match or rollover sub-account assets only, the strategy still works but the available dollar amount changes.
- Schedule distributions in calendar years with the lowest W-2 income: a sabbatical, a reduced clinical schedule, or the gap year before Social Security claims. An $80,000 pull in a $200,000 income year costs far less than the same pull stacked on $390,000. Reserve part of the remaining 401(k) for bracket-filling Roth conversions between 60 and 72.
- In-service distributions during working years, combined with Roth conversions during the gap years, drain the tax-deferred bucket before RMDs force the timing.
The question worth taking to a fee-only advisor: if combined retirement income will cross the first IRMAA threshold ($109,000 for a single filer or $218,000 for a joint filer in 2026), the premium math alone justifies the engagement fee. Crossing that line by even one dollar triggers roughly $1,148 in additional annual Medicare costs per beneficiary, a cliff with no gradual ramp. Knowing exactly where the boundary falls is worth paying for.
Editor’s note: The 10-year Treasury yield figure has been updated to approximately 4.57% reflecting early July 2026 trading, and the expected timing of a possible Fed rate hike was corrected from September to October, consistent with post-FOMC market pricing. The rate environment section now identifies Kevin Warsh as the new Fed Chair and reflects the FOMC’s updated 2026 inflation projections of 3.6% headline PCE and 3.3% core PCE from the June Summary of Economic Projections. CME FedWatch probability data as of July 8, 2026 has been incorporated.
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