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Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76241  
Subject: Re: Further analysis: 401K vs own account Date: 8/6/1998 12:03 AM
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<<Since my
company 401K is not matching and would grow at an
index fund rate of about 10.7%, and RayVts' approach
would gain me a 17.4% return I could retire six
years earlier.

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?>>

I can't see this as being right. Paying LTCG tax as you go reduces the effective return to 13.92% (17.4% * (1-.20)) (BTW, the correct figure to use for SIG4 is 16.5%, not 17.4%. Even so, this is effective 13.2%.)
With taxes figured correctly (28% on dividends, 20% on LTCG), the total effective after-tax rate is 12.9%.

Any way you cut it, this outperforms the S&P500 return of 10.7%. Even more so, when you consider that withdrawals from the 401(k) will be taxed as ordinary income at 28%.

Regards,
Ray
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