It looks like it's cheaper to trade a 401(k) and take the penalty (see chart)

Discussion in 'Professional Trading' started by AshanD, Jul 20, 2008.

  1. AshanD

    AshanD

    It passed through my mind before that it might be better for a profitable trader to trade in a tax deferred account and offset the 10% withdrawal penalty by growing his account faster. Of course how much you withdraw is going to be a big factor, but it seems very worthwhile to have a separate retirement account as a tax deferred growth fund, with the intention of a penalized withdrawal years down the road. (fine if you aggressively grow your account and the tax deference is worth it)

    Assumptions:

    $15,500 starting balance in a self directed 401(k) with no extra contributions. $10k earnings first year, $15k next, 50% ROI thereafter

    No state taxes (higher taxes will increase the attractiveness of the tax deferral)

    A 20% account withdrawal in the 401(k) only is shown for each year BUT NOT CARRIED FORWARD. Each year starts with the assumption of 100% of funds reinvested up to that point. The Taxable account chart has no withdrawal projections.

    I used a regular 401(k) because a Roth seems too easy to "cheat" with (Possible to pump up a small account taxed up front and then withdraw funds whenever for just 10%? Highly doubt that) There must be some harsher rules for early withdrawals. I couldn't find any but saw that the traditional IRA gets a 25% penalty instead of 10%.

    Attached is a picture of the spreadsheet and the file itself.


    [​IMG]

    http://rapidshare.com/files/131242413/Tax_normal_versus_defer_penalty_at_50_.xlsx.html

    Someone tell me if I missed something, thanks.