No. of Recommendations: 7
Author: jesserivera67 | Date: 12/11/04 11:41 AM | Number: 43527
Not sure how many of you get Money magazine but he wrote a very interesting article for January's edition titled, "A Nasty 401(k)Tax Surprise"

This article is only available to Money magazine subscribers, so I'll only be able to comment on your comments.

The article's point is basically to stop funding any stock funds in your 401k and leave your 401k for bonds. The reasoning seems sound enough in that one could be taxed up to 35% when they withdraw the funds at retirement so doesn't it make sense to get a tax managed fund instead and then only get charged 15% long term capital gain tax?

I question the logic here in that stocks seem to inevitably outperform bonds, the 401(k) match, and the fact that for most the 401(k) is their main if not only retirement fund. Say one puts the max into their 401(k) to get the match, are we to only put this into bonds which, for most people I think, severely overweight bonds in their portfolio?

I agree with you. This is especially pertinent to young investors just starting to save for retirement. They probably won't have enough income to fund their 401(k) in bonds, plus fund a non-IRA account with equities. It is far more important to focus on saving for retirement, and on getting reasonable growth in all your accounts early in your career. This has historically required a heavy percentage of equities; maybe 80%/20% equities/bonds.

Later in life, when more money is available to be saved for retirement, it makes a lot of sense to shift the 401(k) toward bonds and shift unsheltered accounts towards equities to achieve your desired equity/bond ratio.

One more point is that tax laws are are always changing. In a few years, long term cappital gains and dividends could be taxed at your marginal rate. Who knows? It hardly makes sense to fundamentally compromise your allocation strategy to try to guess what this moving tax law target will do 20 or 30 years in the future. This would also reinforce waiting until closer to retirement before trying to hit this moving target.

Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.