An internist on a hospital W-2, age 60, $390,000 salary, $1.7 million in the 401(k), four years from a planned retirement at 64. The conventional advice says 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, eating the tax, and parking the money in a regular taxable brokerage account.
The move looks irrational on its face. Pay 32% federal plus state today on money you could defer? That is the point. The numbers favor it once you trace where the dollars actually end up at 85.
Why the 401(k) Turns Into a Liability After 73
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 lands at 22% or 24%, not the 12% many planners assume. Layer in 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%.
An in-service distribution is the escape hatch. IRS Pub 575 permits 401(k) plans to allow withdrawals after 59.5 while still employed. Plans are not required to offer it, so the plan’s Summary Plan Description is the first document to pull.
The Math on $80,000 a Year for Four Years
The strategy: pull $80,000 per year for four years between ages 60 and 63, paying that 32% blended 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 get the same preferential treatment, and anything still held at death receives a stepped-up cost basis that erases the embedded gain for heirs.
Leave the same $320,000 inside the 401(k) and at the same 7% it grows to about $1.7 million. The bigger headline number is the seduction. The catch is that every dollar that comes out funds ordinary income at 22% to 24% federal plus state, and a chunk must come out under RMD rules starting at 73 whether she 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 IRMAA premium relief on the lower reported income.
Why 2026 Is an Unusually Good Window
The 10-year Treasury sits at 4.4%, the 30-year at nearly 5%, and the Fed funds upper bound is almost 4% after cuts since last fall. A taxable brokerage holding longer-duration Treasuries or a direct-indexed equity sleeve can capture those yields while generating loss-harvesting opportunities that a 401(k) wrapper destroys. Tax-deferred space wastes the tax alpha of direct indexing.
Core PCE inflation is running in the 91st percentile of readings over the past year and consumer sentiment is sitting at 53.3, recessionary territory. Both argue for flexibility. A brokerage account is liquid, penalty-free, and free of plan rules.
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 (employer match only, rollover sub-account only), the strategy still works but the dollar amount changes.
- Schedule the 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 in working years plus Roth conversions in the gap years drain the tax-deferred bucket before RMDs force the timing.
The decision worth taking to a fee-only advisor: if combined retirement income will cross the first IRMAA threshold (near $106,000 single or $212,000 joint), the premium math alone justifies the engagement fee.
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