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I've been putting my Keogh plan money into S&P Index funds, but, after running some calculations, I'm wondering if this really makes any sense.

Here is my reasoning: (and this assumes that when you take money out of a Keogh, it is taxed as normal income, and not taxed at a lower rate. If this isn't the case please let me know).

In this example, lets say I'm in the 33% tax bracket and, over, say a 25 year period, I put $200,000 into my Keogh, and invest it completely in S&P and Total Market Index Funds. Now lets assume that by the time I retire 25 years later, and pull the money out, it has tripled to $600,000. If I'm still in the 33% bracket, (and there is no reason to believe I'll be in a lesser bracket when I retire), then my tax bill will be around $198,000.

Now, lets suppose that over the same period I had decided simply to put the money into a taxable account instead of a Keogh, and invest in the same Index Funds as before. The $200,000 that I earned over the years would get taxed at 33%, assuming I don't go into a higher bracket, and this would amount to 66,000.

So, over the years, I would be putting this money into the taxable account invested in Index Funds, but still considering it to be retirement money, and wouldn't start selling off the funds until I reached retirement age. So I would hold it for 25 years or so and, lets say it triples to $600,000, and then sell it. My capital gain would be around $400,000, and, at a 20% captal gain tax rate, my tax on the 400K would be 80,000. So, we add up the original $66,000 (which was paid on $200,000 of my earned income) plus $80,000 (captial gains) and we get a total of $146,000 in taxes paid.

Since the $146,000 in taxes is $52,000 less than what I would have had to pay in taxes if I had put the same money into a Keogh, why would having a Keogh invested in Index Funds make more sense than just investing in Index Funds within a taxable account? Am I missing something?

I realize that this example doesn't take into account any dividends or cap. gains, which I would have to pay due to changes in an Index, but usually those are minimal, and those gains are usually long term, so they may even actually be less of a tax burden when not in a Keogh.

Am I missing something, or, would I really be better off putting my money into Index funds within a taxable account instead of into a Keogh?

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