401k returns vs tax account returns

[Lookie Loo]

I see everyone agrees that you should max out your 401k because of the AGI you receive.  Then invest in a taxed account.  But my question is at what ROI does it make sense to invest in a 401k vs a taxed account?  If I use taxed money to invest in ETF's and consistently return 20%-40%, wouldn't I be better off investing in this instead of the 401k?

[StetsTerhune]

To quite a famous spartan: "If."

[shuffler]

Why not invest in the same ETFs within your 401k?

Your question doesn't really make sense.  A 401k is an account, not an asset-class.  It doesn't have a inherent return associated with it.  You have to choose what to invest your 401k money in, and then you'll have some return (plus tax benefits) that you could use for your comparison.

If you're that good with picking winners, just pick an ETF that returns 50% for your 401k money, and then the 401k will come out ahead.  ;^)

[Lookie Loo]

Thank you for replying.  My employer 401k does not have the ETF's I want to invest in available.  My employer does not contribute anything to my 401k.  Also, i want to retire at 50 years old and live off the returns.  I don't want to wait until 59.5 yrs old.

I'm trying to figure out what ROI do I need in my taxed account which will beat the tax advantage I receive when investing in my 401k?

1. 401k - If I invested $1,000/month, its not taxed.  401k returns an average of 10% a year.

2. Taxed account - If I invested $1,000/month, it gets taxed at 25%, so it will be $750/month.

What average return does the taxed account need to make to beat the 401k return?

[huadpe]

Thank you for replying.  My employer 401k does not have the ETF's I want to invest in available.  My employer does not contribute anything to my 401k.  Also, i want to retire at 50 years old and live off the returns.  I don't want to wait until 59.5 yrs old.

I'm trying to figure out what ROI do I need in my taxed account which will beat the tax advantage I receive when investing in my 401k?

1. 401k - If I invested $1,000/month, its not taxed.  401k returns an average of 10% a year.

2. Taxed account - If I invested $1,000/month, it gets taxed at 25%, so it will be $750/month.

What average return does the taxed account need to make to beat the 401k return?

It depends when you want to retire and what your other income will be.  The further away retirement is, and the less other income you'll have, the better the 401(k).  If you're going to have high income in retirement, or will be retiring in a few years, the 401(k) isn't as good, since it's point is to allow you to have more $ in the market before they get taxed, and to let you shift your taxable income from high-income years to low-income years.

[sheepstache]

It also depends how much you're trading and what kind of ETFs.  Qualified dividend rate for you would be 15%.  Ordinary dividend or money from bond etfs would be 25% (and REIT ETFs?  I'm not sure?).  So every time you reinvest you don't have as much to reinvest whereas in the 401k it's deferred.
Also as huadpe says, it depends how much you plan to retire on.  If you plan to still be in the 25% bracket (your short time frame is good as probably there won't be major changes in the tax rate, but who knows? it seems to me investment tax rates are more likely to change, but, again, who knows?), the 401k isn't helping you at all except for having more principal to invest initially.  So all you have to beat is whatever the return would have given you on that .25 and then (.15)(yearly dividend)(number of years).  Okay, there's a bit more to it than that but if you can't do the math then you probably can't get superior returns either.  Wow, that made me sound like a real dick.  Not what I intended.  The point is that the tax advantage of the 401k depends on more variables that are unique to your situation than just your tax rate.