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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 76397  
Subject: Re: 401(k) with no match? Date: 2/6/1999 9:59 AM
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Greetings, Patrick, and welcome. You wrote:

<<My lovely wife will be eligible for her employer's 401(k) plan shortly, so I am trying to decide whether she should participate or not. It may be better for us to invest for retirement with after-tax funds instead. I am trying to build a spreadsheet to quantify the options, but I wonder if there is a "calculator" on the Web that I can use to help me decide?

Here are some details, if you Fools have any thoughts on the matter:
There is no employer match.
We are in the 31% tax bracket, close to 36%, and probably will be at retirement as well (we already have substantial retirement savings).
The funds offered DON'T include a S&P 500 Index.
She is 27 years old.

Our tax bracket makes the taxation of 401(k) funds as ordinary income at retirement very unattractive, when compared to the LT capital gains tax rate (I know, who can say what rates will be in 30+ years?). OTOH, at 31% of $10K, we will have an extra $3100/year to invest and grow if we use the 401(k). Of course, we will both fund Roth IRA's for as long as we are eligible.>>


I know of no online calculator that will enable you to do that type of analysis; however, I suggest one approach that will give you a breakeven return needed in an taxable investment to equal that in a 401k after it, too, has been taxed. You can find that approach outlined in Step 4 of my 13 Steps to Foolish Retirement Planning. You will find it at http://www.fool.com/Retirement/Retirement.htm . That will give you a good start on doing such an analysis for yourself, but it doesn't adjust for anything taxed at a capital gains rate. As Ataloss points out, though, there are a lot of variables so no simple calculation is really available. Another wrinkle for consideration is the taxes on a taxable investment probably won't all be at capital gain rates. Dividends come into play, and they get taxed at ordinary income rates in the year of receipt. Something like 35% to 40% of the total return in the S&P 500 Index over the last 73 years has come from reinvested dividends.

Regards….Pixy
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