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<<Ok, I've been thinking about this some more (perhaps too much :) and there's another factor not accounted for in this analysis.

This analysis holds true only if the money is removed from the tax deferred investment each year and taxes are paid at that point.

If its not, then in the first year, the difference between the $10 earned in the deferred account versus the $7.20 after tax, or ($2.80) is STILL in the deferred account to increase the basis for the following year.

So, for the second year, the tax deferred account would earn 10% of $110, or $21 while the after-tax account would get 13.89% of $79.20 or $11.

Compounded over 20-30 years of retirement savings this would be substantially in favor of the tax deferred account.

My math skills are not quite up to par at this late hour. Someone care to put forth the formula for calculating the after-tax rate required to account for the compounding over 20-30 years?

I'd love this to work out. I'm at a startup company that's too small to match contributions. The 401K plan is great for a company our size, but the mutual fund choices don't really excite me. I'd rather invest the money myself.>>

In this analysis, the number of years makes no difference. At some point the money must be removed from the IRA. When it's taken, it will be taxed. The formula simply says it will be taxed at the same rate then as it would be now. That's why it's a simplistic analysis. Your tax rate then may be higher, lower or the same. The formula simply holds it constant for ease of comparison.

Just like when making a Roth decision, we all need to speculate. I don't want my tax rate to decline in retirement. In fact, I would enjoy seeing it increase to a higher bracket in today's dollars because that means I'm doing a superb job in my savings program. The worst I want is to see my tax bracket stay the same. But that's me. You have to decide whether the formula works for you in your planning.

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