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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Re: Further analysis: 401K vs own account Date: 8/5/1998 11:56 PM
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Greetings, Mr. Jones, and welcome.

But I began to think: let us assume that 1/2 of the
stocks in the DDA approach turn over each year, and
you must pay a 20% capital gains tax on the gains. Then
putting money in the 401K gives FAR superior returns.
Step 4 would seem to be a horrible suggestion. If I've
done my formulas correctly (see below) Excel shows
the difference to be between $100K and $700K of 1998
dollars.

Does anyone else have the same findings? Or do you
think my calculations are flawed?


Well, they might be flawed and they might not. The problem is we can't tell because you didn't post the assumptions and calculations you used. Offhand I'll posit you erred somewhere. The formula in Step 4 assumes you pay ordinary income tax each year on the return you receive in the taxable account, so the return you must make to equal the 401k is already net of taxes. If in the 401k you get 10.7% and you're in a 28% tax bracket, then your return in a taxable alternative must be ~14.9% to equal the return in the 401k after it, too, has been taxed. Your scenario uses a 20% capital gains rate. That means the needed rate of return drops to ~13.4%, which makes the 17.4% look even more attractive.

Show us what you used, and we can verify or refute your hypothesis. BTW, you may want to read Step 4 again -- particularly the proof -- to ensure you haven't missed anything.

Regards....Pixy

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