<oprah.chopra@[EMAIL PROTECTED]
> wrote in message
news:5fe6e30b-2c82-4844-b37b-e49ccba88146@[EMAIL PROTECTED]
>I am reading that tax deffered account like 401K aren't so great
> because you end up paying ordinary income tax rates on the
> withdrawls. Is it better then to invest your money directly in stocks
> and just pay the long term capital gains tax rate, 15%?
My back-of-envelope calculations suggest that this is a difficult question
to answer. There is no question that even if capital-gain tax rates are
substantially less than ordinary income tax rates, you are better off with
a
tax-deferred account if you wait long enough. The trouble is that the
definition of "long enough" varies wildly with the particular situation.
As
an obvious example, if regular income tax rates are 25% and capital-gains
rates are 15%, then you pay an extra 10% on all your earnings if they're
in
a tax-deferred account. However, in the tax-deferred account, those
earnings compound tax-free until you withdraw them, which means that the
extra money you make will eventually outweigh the difference in tax rates.
How long you have to wait depends on how your investments perform, when
you
need the money, what happens to future tax rates, and lots of other
imponderables.
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