Maximize Your Tax Benefits
Regardless of your contributions and investments to your 401(k), the money you withdraw from it is still considered ordinary income and taxed accordingly. In other words, you’ll have to pay the same tax rates on the money taken out from your 401(k) as you do on your usual salary. This is a major drawback because the tax you have to pay for long term benefits in stocks becomes higher.
For example, if you have stocks in a taxable investment account and keep them for at least one year, you’ll have to pay between 0% and 15% on those benefits. On the other hand, with your 401(k) and depending on your income tax bracket, you might have to take more money out of your wallet.
Therefore, it would be a better idea to focus on income-generating investments like bonds in your 401(k) instead of capital gains investments such as stocks. If you’re not sure what to do, ask your financial advisor for more details.
