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URL:  http://boards.fool.com/ltltlets-say-im-in-a-28-federal-tax-10159162.aspx

Subject:  Re: 401(k) and foolishness revisited Date:  4/21/1998  1:03 AM
Author:  maxb Number:  2952 of 76112

<<Let's say I'm in a 28% federal tax bracket, I get no or have reached the maximum match from my employer, and I deposit $100 into my tax-deferred account where I expect to earn 10% on my deposit. What rate of return do I have to get in an after-tax investment to equal what I'm getting in that plan? Well, by using the formula, I get:

Ra = Rp / (1 - TR)
Ra = 0.10 / (1 - 0.28)
Ra = 0.10 / 0.72 = 0.138888 = ~13.89%>>

This is a great analysis. Thanks for the information.
Simple math question though. Please correct this reasoning if I'm wrong.

Since I live in a high tax state (California), when I do the analysis I need to factor in the state tax that I'll pay on the money I'm not contributing to my 401K.

So,
TR = (Federal Tax Rate + State Tax Rate) =(0.28 + 0.09)
Ra = 0.10 / (1 - 0.37)
Ra = 0.10 / 0.63 = ~15.87%

Also, for people on the bubble of tax brackets you need to consider whether discontinuing 401K contributions will push you into the next bracket and calculate based on that.

-max

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