No, you don't end up paying 35%. Part of the advantages of a 401k come from distributing dollars being taxed at a high marginal rate to another year when they are taxed at a lower marginal rate.

It all depends. Sure, if you put almost nothing in a 401k, then when you pull it out, you'd be in a lower margin tax bracket (and living on very little money).

But if you put a lot in, the fact you HAVE to start taking money out at a certain again AND it all gets taxed before you die means you pretty much end up paying the taxes anyways (or more if rates have gone up).

It's slightly different here, but effectively the same. Individuals get sold on the idea of "tax-back" from the taxation authority at the end of the year... They get bombarded by financial consultants that tell them they have to put up to 30% of their post-tax earnings into 401k-type accounts because they are "maximizing" their "tax-benefits".

A lot of them even have no idea that they will be taxed anyways when they withdraw.

Which, not coincidentally, is also what the companies stashing profits overseas hope to accomplish through future changes in the tax law.