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I hope someone can clear something up:

I don't understand the mechanics of taxes for index funds and mutual funds that are part of a 401k. I understand, from reading stuff on this site, that high turnover is bad. But here's what I don't get: Is that "badness" something that gets factored into the annual return of the fund, or is it something that the unsuspecting soon-to-retire person finds out as he cashes out?

Let me ask this another way. Let's say Person A has a managed mutual fund that over 20 years has had an average return of 14%. Person B has an index fund that also has had an average annual return of 14%. Both people started out on the same day, with the same amount of money, and contributed the exact same amounts at the exact same times along the way. At the time of cashing out of the 401K, would there be any difference at all between what the two people would pay in taxes?

Any help would be appreciated.

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