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Subject:  Re: Taxable vs tax Defered Date:  9/6/2001  1:25 PM
Author:  jmjkon Number:  31843 of 88826

Sonnet writes:I read in one of those investing rags recently that it would be better if you are within five years of retirement to put the money into a taxable account because the advantages of a lower capaital gains tax rate in the taxable account begin to out weigh the ordinary income tax rate of the 401k even with the deferal. This may not apply if you don't need to take out the money right away at retirement.

JK: This is something I've been thinking a lot about lately, and my conclusion is to start investing some of my retirement money in an after-tax, retail account.

I'm doing this because I feel I am getting overweighted in the S&P 500 index, and that's the only worthwhile option my employer has for my 401k right now. So the next time I increase my contribution to my retirement savings I will not increase the amount going to the 401k but I will send the amount of the increase to a Mid Cap-4 stars from M*-expense ratio 0.89%-regular retail fund instead.

In addition to giving myself more weight in the Mid Caps, I am increasing flexibility of my investments- I can cash out at any time should my needs change, and that is a significant consideration for me.

Also, there is the tax angle that I sort of understand, but could use some clarification on. If I cash out long term holdings in a regular after-tax fund, then I am only paying taxes of at most 18% long term capital gains, right? That is, under new tax law, stocks bought in 2001 and held at least 5 years get this treatment, right?

Using after tax investments for retirement sort of goes against what I've been reading on the REHP board, which suggests re-allocating money from equities to cash/CDs starting 5 years before you retire. But if I cash out an after tax stock index before I'm ready to retire, I'm taking more years of compounding/making-up-for-not-compounding away from that after tax investment, no?

So there's where I feel a little lost. I tentatively think that when I do retire, I should hold the after-tax stock investments as long as possible and use up the 401k money first, since that will be taxed as regular income - that way I can let the after tax equity investment grow longer. Or I guess I could withdraw half my needs from the 401k and the other half from the after tax account and get a lower average tax rate too, that may work. Or not.

Anyone have any thoughts? All help appreciated--


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