Tax Considerations for Investments in Retirement Accounts

Humberto Cruz has an article entitled “After-tax allocation tricky to calculate”. It reminds us of two factors for considering our retirement savings.

First, funds in a before-tax account such as a traditional IRA should be discounted based on your expected taxes when withdrawing them. $100,000 in a traditional 401(k) is not the same as $100,000 in a Roth IRA or even $100,000 in a normal after-tax account. While I expect at least some of my 401(k) savings to be withdrawn at a lower tax rate, I also expect to pay some taxes on it. For current tracking purposes, I discount the value of my 401(k) and traditional IRA accounts by my current marginal tax rate when calculating my net worth.

The second factor to keep in mind is that withdrawals from before-tax accounts are taxed at your ordinary tax rates at the time. Long term gains from stocks do not enjoy the capital gains income tax rate of 5% or 15%.

Read Humberto’s article to see how he handles these two factors.