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You wrote, I contribute about 8k a year to the 401(k) where I work. (There is no match.) This money goes totally into VIIIX, an index fund. I expect to be in the same tax bracket when I retire, and when I take the money it will be taxed at ordinary income rates. One thing is, if I invested that amount of money outside the 401(k), e.g., in VFINX, I'd only have to pay capital gains tax, which would be lower. So in one way, my curent set-up seems dumb. One consideration on the other side, however, is that a larger chunk of money goes into the VIIIX fund this way (because it's all untaxed). But the biggest consideration for me is that this way the money goes automatically--it's just taken right out of the paycheck, so it's easy for me not to miss it. I'm wondering whether this is indeed a strong argument for keeping my current arrangement, or whether my argument about the lesser tax in a non-401(k) account carries weight, or whether I should just get out of the 401(k) thing completely, and exert some will power and invest the money in a taxable account. Would appreciate some help on thinking this through... TIA.

When you invest in a conventional account, you pay taxes twice -- well, at least twice. Once when you earn the money. And again when you pay the capital gains or dividend taxes. With any tax-advantaged account, you would pay taxes only once -- in regular income tax either when you make the contribution or when you take a withdrawal.

If you expect your tax rates will remain the same now through retirement, it doesn't matter if the tax-advantaged account is a conventional IRA or 401(k) plan; or a Roth account. Both conventional and Roth plans will produce identical results for you given identical investments and proportional costs. Of course, the conventional plan might be slightly more efficient if you use the account to invest in assets that have fixed transaction fees -- such as stocks -- because you'll get to pay those fees with pre-tax dollars. But unless you do a lot of trading, these differences shouldn't be significant.

- Joel
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