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I believe MarkOYoung has posted recently with some or most of this information, but here goes....
When 401(k) Isn't the Best Savings Option

Saturday October 26, 9:08 AM EDT

By Linda Stern

WASHINGTON (Reuters) - Washington is trying harder to protect
workers from troubled 401(k) accounts, but there's new
research to show that even a well-run 401(k) isn't always the
best option for retirement savings.

Some employees in specific situations would be better off
investing on their own in a taxable account and ignoring their
company plan even if it's sound, according to Phillip Fink, a
professor of taxation at the University of Toledo, Ohio.

Fink has run numbers to show that investors with a short time
frame -- who expect to be in high tax brackets when they retire,
and who think won't spend all their 401(k) money before they
die -- might be better off investing in a taxable account.

His work, published in the latest edition of "Tax Strategies," an
accounting industry trade publication, details the various ways
that 401(k) plans can backfire on participants.

Fink offers a hypothetical example: A 54-year-old worker who dies at 75 will leave his wife with more money if he doesn't invest in a 401(k) plan than if he does.

This doesn't mean that workers should abandon their company
retirement plans now. For most, tax-deferred contributions into
their 401(k) and matched by employers are among their best
investment options. But, before feeding your plan to the max,
look at this list of 401(k) problems.

-- The tax deferral doesn't always work as well as you'd like.
Getting an immediate deduction for a 401(k) contribution is nice,
but at the other end of the plan you have to pay federal, state
and local income taxes on everything you take out of the plan.

If you retire in a high tax state, and have even the average 27
percent tax bracket, you can end up using up more than a third
of your withdrawals on taxes. Contrast this with the 18 percent
or 20 percent capital gains tax that typically applies, and you can
end up paying a lot more in taxes on those 401(k) earnings than
you would on stocks held in an ordinary taxable account.

-- The fees can eat you up. Many employers have transferred a
greater percentage of the cost of running a 401(k) plan to their
workers. In some cases, workers are paying not only high sales
fees (called loads) and management fees for the mutual funds in
their 401(k) plans, but also administrative costs of the plan itself.

"A mutual fund that has a load can very easily negate the benefit
derived from the tax exclusion for 401(k) plan contributions,
tax-deferred growth, and employer match," says Fink.

The investor in his hypothetical example has a company plan
charging 5 percent a year in fees. That's high, but workers who
find similar fees in their own plans might think twice about making
big contributions.

-- You can still be overloaded in company stock. Remember
Enron? Employees who had the bulk of their retirement plans tied
up in Enron stock got wiped out. And legislation that would
protect employees from too much company stock is stalled in

As the law now stands, employers can pay all of their match in
company stock, require you to invest added amounts in
company stock from your 401(k), and keep you from selling it
until they are ready. That's just not a good way to tie up
retirement money. If your plan remains company-stock heavy,
rethink your contributions.

-- You have to take your money out when you hit a certain age.
What if you have enough money at 70-1/2 to keep your 401(k)
fully invested and live off of other funds? Sorry, taxable
withdrawals must begin at that age. So, if you foresee yourself
being comfortable in retirement, with a high-tax bracket and
other sources of income, the 401(k) might not serve you well.

-- Stocks are better to inherit. Buy a stock for $10 and leave it
to an heir when it has grown to $100, and the heir gets to
declare the stock's new basis as $100. He can sell it for $100
and not pay any capital gains tax.

There's no similar step up in basis for a 401(k) plan that gets left
to a new generation, because there's no gains tax. Ultimately,
the heir will have to pay income tax on the entire $100. Again,
this is a disadvantage primarily for well-off retirees.

The bottom line? A good 401(k) can save taxes and build a nest
egg. But, if it's an expensive 401(k), with questionable
investment choices, workers who expect to be comfortably
situated may want to make other choices.

(Linda Stern is a freelance writer who covers personal finance
issues for Reuters. Any opinions in the column are solely those of
Ms. Stern. You can e-mail her at lindastern(at)aol).

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