bberris wrote:I've seen a few posts about what to do if your 401k has all bad choices. Here is a link to some research on after tax returns of stocks, bonds, real estate and commodities. It will probably open your eyes to a few interesting facts. The important one for me: For stocks, it does not make much difference whether you invest in or out of a tax-deferred plan. The reason is simple. You lose the tax-favored status of capital gains and dividends in a tax-deferred account.
With bonds, you don't have the tax-favored income, so returns are better in a deferred account.
So if your stock fund choices are all bad in your 401k, just say no.
Your take-away from this study is only briefly and vaguely mentioned in the following paragraph:
Thornburg Investment Management wrote:Most equities receive the majority of their returns from capital gains, but the effect the account type has on real real returns is similar. If gains are deferred until sale, they are taxed at the relatively favorable 15% rate for a taxable account. If held in an employer-sponsored plan, withdrawals are taxed as retirement plan distributions at ordinary income rates. The real real return over the past 30 years for large-cap equities (as represented by the S&P 500 Index) is 5.78% in a fully taxable account versus 5.72% in a tax-advantaged account. Again, account type matters and planning is key.
And these are some assumptions:
In calculating the real real returns you see portrayed in this study, we apply the highest ordinary income tax rate in place at the time the income was generated and we assume that taxes are paid from income received.
For purposes of this study, we apply the highest dividend tax rate in effect at the time of the investment.
For the purposes of calculating the real real returns portrayed here, we assume investments are held for more than one year, and apply the 15% rate at the time of sale.
Either the assumptions are grossly unrealistic, or as Grabiner said, the study failed to properly account for the after-tax returns in taxable vs. tax-advantaged accounts using equivalent pre-tax contributions into each type