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<<As far as i know 401k distributions are always counted as income and taxed at ordinary tax rates.>>

That's a reasonable's not completely correct in that you might be able to take a stock distribution from the 401k account that may relate to capital gains in the future.

<<A person brought up the point that they are not and i completely disagree with him or her. They say that the section in the tax code 402(e) 4 contains a provision which allows distibutions to be taxed at capital gains rates.>>

Potentially yes. If the 401k is invested in the stock of the company for which you work...and then that stock is distributed to you.

<<I read the 402(e) section and it talks about employer stock held in a trust which, if elected to be taken out, is added on to income. After this is done the stock grows tax deferred and is only taxed at CAP GAINs rates. I agree with this. It is just like purchasing stock from the stock market and but youre buying your employers stock with after tax dollars. Same thing applies to 402(e). >>

Basically correct. I've written about this in the Taxes FAQ area (I think). If not, I know that TMF Pixy has a number of articles on this very issue in the Personal Finance/Retirement section of the Fool. You might want to check it out.

<<I do not know of any way that a DEDUCTIBLE 401k can grow tax deferred and at the END or Retirement be taken out and given prefferential CAP GAINS treatment. If I am wrong please advise.>>

It's certainly possible. Do a search for Pixy's article and you'll find out EXACTLY how it works. Do a search of the fool and use the terms like "401k" and "capital gains". You'll be amazed what you come up with. If you have any trouble finding the article, or getting your arms around the concept, let us know by giving us a follow-up post right here in the Tax Strategies folder.

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