shadowofjazz wrote:legends159 wrote:

Super simplistic example but let's say have $10,000 to either put into 401K or in taxable investments. Let's also assume a 10% annual return and 25% tax.

401K = $10K + 10% growth = $11K - 25% tax = $8.25K

Taxable = $10K - 25% tax = $7.5K + 10% growth = $8.25K - 15% capital gains = 8.1375K

Notice whether you're taxed at the beginning or the end doesn't matter - it's the double tax with taxable accounts that give you a lower return.

Also - we're assuming capital gains tax in 20-30 years when you retire will remain 15%.

So the total tax in line 2 above is 2.5K+0.1125K or 2.6125K. Total tax from line 1 is 2.75K. With no employer matching, the taxable investment is the better option with those assumed growth values. But you'd be holding these long term anyways so this is all pointless. Odds are a 401k/your chosen taxable investment won't have 10% growth per year.

Not true. The important number to look at is the end result, comparing $8.25k to $8.1375k -- not the amount of tax paid. The reason line 1 has a higher tax total is because the initial investment was larger ($10k vs. $7.5k), resulting in greater appreciation, which was then taxed.