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1. Stay in the 401(k) putting in $10k per year & earning 8% for 30 years. Result is $1,178,145
before tax; $789,357 after tax assuming a 28% federal rate and a 5% state rate.

2. Open an after tax account, putting in $6,700 per year (the same $10,000 minus current year
federal and state taxes at 28% & 5%), but earning 12% per year (50% better than the 401(k)
plan), and also subtracting 20% of the earnings each year (assuming our investor is smart enough to
generate all LTCG on the taxable earnings). Result is $1,071,004 after 30 years. Actually this
number would be a little smaller if the earnings in the account have some regular income during the
years; nonetheless, the after tax account handily beat the 401(k) plan by 35%.

Then I tried model #3, within which the employee stays in the 401(k) suffering the poor returns for
10 years. At the end of 10 years, the employee quits & rolls over his 401(k) account to a
self-directed IRA (so he can now achieve the 12% per annum return for the next 20 years).
Additionally, he goes to work for a new employer that does have a better 401(k) plan that allows
him to achieve 12% return on contributions made in years 11 to 30. Results: $2,217,069 before
tax; $1,485,436 after tax; 39% better than the after-tax account.

Wow, thanks for that model Badger.. this might very well be the most definitive answer I've seen on this topic yet. The one question I have is whether it is always possible to switch your 401k when leaving your employer to a self directed IRA.. That does sound like the best option for me right now, especially considering I have 40 years of working ahead of me (well, hopefully less with the Fools help). If you don't mind, I'd like to send your message over to my manager to help explain why I might change my mind once again and continue my contributions, in the hope that it will one day be rolled over into a self directed IRA.

Thanks again,


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