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Pixy says:

<<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.>>

I enjoyed your formulas. Based on the dependence of the tax rate at retirement, doesn't it make sense to diversify based on taxes. By this I mean invest equal amounts in tax deferred and taxable accounts up to the allowable in the tax deferred accounts. Sure, this won't give you the highest returns but it will give some protection to the uncertainty of taxes in the future.

An example: You have $6000 to invest. You can still contribute $3000 (after match) to your 401(k). You get 10% return in the 401(k) and 13.89% in the taxable. I suggest splitting the money between the 401(k) and taxable account. Of course if you can easily beat 13.89%, then it should go to the taxable.

It appears that there is alot of uncertainly in future tax rates. The Republican propose abolishing the tax code by 2005 to force a rewrite of the tax laws. Proposals include a flat tax, a consumption (sales) tax, and lowering the capital gains tax. It appears that the flat and consumption tax would favor money put in today's tax deferred accounts and lowering the captial gains tax would benefit taxable accounts.

Investing is a personal choice (borrowed that from you Pixy). We all have to speculate on the future. My proposal is just an opinion. As long as we stay in the stock market and beat inflation, we will all get to the finish line even if it is not in first place.
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