I recently argued that it’s way to soon to start dumping old investments and buying new ones on the basis of President Bush’s tax-cut proposal.

But what if you have some new money to invest? Maybe you accumulated a chunk of cash during the bear market or have to decide what to do with routine investments made through a 401(k) or other automatic investing program.

Again, it’s probably too early to make dramatic strategy changes, since no one knows how the president’s plan will be changed in Congress.

Moreover, an analysis recently released by T. Rowe Price, the Baltimore fund company, shows the Bush plan, even if it becomes law as proposed, probably would not necessitate dramatic changes in investment strategies. In most of the scenarios examined, the strategy that works best now would continue to do so under the Bush plan. And in the exceptions, the benefits of adopting a new strategy would not be very great.

President’s plan

The president has proposed eliminating the income tax investors pay on dividends they receive. Obviously, that would make dividend-paying stocks more attractive than they are now, since dividends currently can be taxed at rates as high as 38.6 percent.

In an odd twist, though, dividends would continue to be taxed if the stocks were held in a tax-deferred account such as a 401(k), traditional IRA or annuity. In those accounts, dividends are not now taxed the year they are paid, as they are in ordinary taxable accounts, but they are taxed when money is withdrawn from the account — generally after the investor retires. That would not change under the Bush plan.

Under current rules, dividend-paying stocks (or mutual funds that own them) do best in tax-deferred accounts, since the tax bill, though inevitable, can be avoided for as long as the money remains in the account.

But if dividends would continue to be taxed in these tax-deferred accounts, it looks like dividend-paying stocks would do best under the Bush plan in taxable accounts, where they’d be tax-free.

Plan put to test

To test the theory, T. Rowe analysts first looked at a person who had $10,000 to invest in a growth fund, with dividends representing 8.58 percent of total return (stock price gains plus dividend payments).

They assumed an annual return averaging 8 percent. They assumed a combined federal and state income tax rate of 30.65 percent, and a combined federal and state capital gains tax rate of 25 percent.

Under current law, the $10,000 investment would initially grow faster in the taxable account. But after 12 years, the tax-deferred investment would catch up and continue moving ahead. After 20 years, for example, the taxable account would be worth $33,730 and the deferred account $35,389.

Under the Bush proposal, the initial advantage of the taxable account would last much longer — for 19 years before the tax-deferred account caught up. This is because the dividends received in the taxable account would no longer be taxed. After 20 years, the taxable account would be worth $35,136, a bit more than under the current law, while the tax-deferred account would be worth $35,389 under both laws.

The analysts also looked at what would happen to an investor who started with $10,000 and could get a tax deduction on that money if it went to the tax-deferred account but not if it went to the taxable account. This would be someone, for example, who could use a 401(k) allowing an income tax deduction on contributions.

This investor would start with $10,000 in the 401(k), but, after paying income tax, would have only $6,935 if she choose the taxable account.

As you might expect, the big difference in starting amounts allows the tax-deferred account to grow faster under both the current law and the Bush proposal.

To see what would happen if dividend payments were larger, the analysts looked at an equity income fund in which dividends accounted for nearly 32 percent of annual return. All the other assumptions were the same.

If $10,000 were invested in each type of account, the taxable account would always do better than the tax-deferred account, under both the current law and Bush proposal.

And if $10,000 were invested in the tax-deferred account and only $6,935 in the taxable account, the tax-deferred account would always do better.

Here’s the conclusion

Out of all these combinations, the only one that presents the investor with any dilemma at all is the one involving the investments of equal amounts in funds that pay relatively low dividends. That’s the investor who would do better in the taxable account for 19 years under the Bush proposal but for only 12 years under the current law.

And yet, the penalty for betting wrong is not very large. If this investor choose a tax-deferred account and withdrew his money after 15 years, he’d have $25,064. If the Bush proposal had become law, he could have done better over that period in a taxable account, but he’d have only $378 more.

You could alter the assumptions to get different numbers, of course. But the T. Rowe study makes a convincing case that investors need not do any radical surgery on their portfolios while Washington debates the president’s plan.