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Author: maxb One star, 50 posts Old School Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Re: 401(k) and foolishness revisited Date: 4/21/1998 1:03 AM
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<<Let's say I'm in a 28% federal tax bracket, I get no or have reached the maximum match from my employer, and I deposit $100 into my tax-deferred account where I expect to earn 10% on my deposit. What rate of return do I have to get in an after-tax investment to equal what I'm getting in that plan? Well, by using the formula, I get:

Ra = Rp / (1 - TR)
Ra = 0.10 / (1 - 0.28)
Ra = 0.10 / 0.72 = 0.138888 = ~13.89%>>

This is a great analysis. Thanks for the information.
Simple math question though. Please correct this reasoning if I'm wrong.

Since I live in a high tax state (California), when I do the analysis I need to factor in the state tax that I'll pay on the money I'm not contributing to my 401K.

So,
TR = (Federal Tax Rate + State Tax Rate) =(0.28 + 0.09)
Ra = 0.10 / (1 - 0.37)
Ra = 0.10 / 0.63 = ~15.87%

Also, for people on the bubble of tax brackets you need to consider whether discontinuing 401K contributions will push you into the next bracket and calculate based on that.

-max
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