Yes, but how can it possible be effective or worthwhile for the uber rich if they are in the highest tax bracket when deferring and when withdrawing? Why bother?
I don't see how a Bill Gates or even Mitt Romney get any juice from these if they defer a the maximum rate and then withdraw at the maximum rate.
Even if the tax deferral rate going in is the same as the tax payment rate coming out, it's still better to defer. The difference is that the person who defers doesn't have to pay capital gains taxes (or taxes on annual dividends) on the earnings. The person who defers eventually pays income taxes on the original investment plus the investment returns. The person who does not defer initially pays income taxes on the original investment and eventually pays capital gains taxes on the investment returns. But here is the tricky part. Because the investment is initially taxed at the income tax rate, the person who does not defer is effectively paying regular income taxes on the investment returns too. In essence, the investment returns are pre-taxed at the income tax rate.
Consider the following example. For simplicity, assume a 50% income tax rate, a 25% capital gains tax rate, a 10% return rate (no dividends), and a 30 year investment period. Assume Bill Gates and Mitt Romney both have $10K available to invest. Bill puts his money in a 401K. Mitt puts his money in an after-tax account.
After 30 years, Bill's $10K grows to about $174K inside his retirement account ($10K x 1.1^30). He withdraws the money from his account and pays 50% in taxes. He now has $87K to spend.
Mitt can invest only $5K because his $10K is initially taxed at 50%. After 30 years, Mitt's $5K grows to about $87K - the same as Bill's. Mitt withdraws the money from his taxable account and pays 25% in capital gains taxes on the earnings. He now has only $67K to spend. This is about 25% less than Bill.
In this example, the benefit of deferral is basically equal to the capital gains tax rate. So deferral is very advantageous even when the before and after tax rates are the same.
Admittedly, Bill and Mitt probably don't care because the amount they can contribute to a 401K is trivial compared to their overall portfolio's. But it matters to me. Even though I'm not Bill Gates or Mitt Romney, I have a sizable DB pension waiting for me and my marginal tax rate in retirement will be (almost) the same as the rate while working. Deferral is good.
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