The Motley Fool Discussion Boards

Previous Page  
Investing/Strategies / Retirement Investing 

URL:
http://boards.fool.com/ltlttmfpixywritesletsmakeasimple10159187.aspx


Subject: Re: 401(k) and foolishness revisited  Date: 4/21/1998 1:31 AM  
Author: maxb  Number: 2953 of 76882  
<< TMFPixy Writes: Let's make a simple comparison between a taxdeferred investment like a 401K plan and an ordinary taxable investment. Further, let's assume that ultimately you'll withdraw all your monies from the taxdeferred account and be taxed on that amount at today's marginal tax rates. It's not quite that simple because in reality you'll decide how that money eventually comes out, maybe all at once, maybe piecemeal leaving the rest to compound, but for this simplistic analysis it's close enough. In a further nod to simplicity, let's agree that all gains in the taxable account will be taxed at ordinary rates even though we know that at least half would be taxed at the lesser capital gains rate. . . . Proof?? In the taxdeferred account a $100 deposit would earn $10 at a 10% return, giving a total of $110. Withdrawing that $110 and paying taxes at 28% would leave $79.20. $72 in an aftertax account would earn $10 at 13.89% or $7.20 after taxes, leaving $79.20 total in that account after taxes. >> Ok, I've been thinking about this some more (perhaps too much :) and there's another factor not accounted for in this analysis. This analysis holds true only if the money is removed from the tax deferred investment each year and taxes are paid at that point. If its not, then in the first year, the difference between the $10 earned in the deferred account versus the $7.20 after tax, or ($2.80) is STILL in the deferred account to increase the basis for the following year. So, for the second year, the tax deferred account would earn 10% of $110, or $21 while the aftertax account would get 13.89% of $79.20 or $11. Compounded over 2030 years of retirement savings this would be substantially in favor of the tax deferred account. My math skills are not quite up to par at this late hour. Someone care to put forth the formula for calculating the aftertax rate required to account for the compounding over 2030 years? I'd love this to work out. I'm at a startup company that's too small to match contributions. The 401K plan is great for a company our size, but the mutual fund choices don't really excite me. I'd rather invest the money myself. max 

Copyright 19962015 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us 