Are You Overstuffing Your 401(k)?
Business Week (07/15/02) Vol. 18, No. 2 p.126; Coy, Peter

Investors are often encouraged to be generous with their contributions to their 401(k)s, but many workers are unaware of tax benefits that smaller contributions afford. Economists Laurence J. Kotlikoff and Jagdeesh Gokhale say workers are better off if they transfer contributions from their 401(k)s to other accounts. Payouts from 401(k)s are taxed as regular income, while long-held investments in unsheltered accounts are taxed at the lower capital-gains rate when sold. Overly healthy 401(k)s are likely to generate more taxable income than plans of average size, plus expose more of the investor's Social Security benefits to income taxes, the economists say.

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