vanbucky wrote:According to my calculations with the above scenario (attempting to use historically realistic numbers), you would best off putting $13,333 pretax in the stock fund in 401k, and $10,000 in bond fund in taxable account.
I think this is because the stock fund's 10% return is higher than the bond fund's 5% return, so the capital gains tax advantage in 401k outweighs the dividends advantage.
Am I correct about this? Or are there some things I'm overlooking?
If you put the stocks in the 401(k), you are taking on more risk. $13,333 in a 401(k) is worth the same as $10,000 in a Roth IRA, which is worth much more than $10,000 in a taxable account. Thus, if you have $13,333 in a 401(k) and $10,000 in a taxable account, your portfolio is effectively more than 50% in the 401(k).
In practice, the taxes on a taxable account and 401(k) are about equal; the 401(k) will lose 25% of its value to taxes on withdrawals, while the taxable account (if invested in stock) will lose a bit to dividend taxes every year, and 15% of its gains to taxes on capital gains.
Here's what I get if both accounts are $10K, and the stock fund returns 10% with a 2% qualified dividend yield for 30 years.
$10K in tax-deferred bonds: $43,219, $32,415 after tax
$10K in taxable stock (growing at 9.7%): $160,768 including $124,345 of unrealized gains and $26,423 of reinvested dividends, $142,116 after tax
If stock has no capital gains (growing at 1.7%): $16,581 in taxable, no tax due, total $48,996, which is 71.9% less
$10K in tax-deferred stock: $174,494, $130,871 after tax
$10K in taxable bonds (growing at 3.75%): $30,175, no tax due on withdrawal
If stock has no capital gains (growing at 2% in tax-deferred): $18,114 in tax-deferred, $13,585 after tax, total $43,760, which is 72.8% less
So you come out ahead with stocks in taxable, and the risk is about the same now; if the stock market returns 2% rather than the expected 10% (and it could do that in a bad 30-year period), you lose about the same fraction of your portfolio either way.
For bonds in taxable to come out ahead, you need to earn 5.04% on municipal bonds of the same risk level as the bonds you hold in your 401(k). (Total Bond Market does have a lower yield than municipal-bond funds right now, but that's because of risk issues; Total Bond Market includes a lot of Treasuries and GNMAs. Intermediate-Term Investment Grade has a higher yield than Intermediate-Term Tax-Exempt.)