There is a flaw in your math. What you are talking about isn’t really double taxation but the smaller compounded gains because for some reason you assume taxing all of your capital gains every year. But the taxes on capital gains are payable when you sell the stocks/funds. Sure some mutual funds have capital gain distributions, but these are gains realized from selling stock within the fund (which an index fund shouldn’t do that often) not from stocks growth.

Obviously you need to choose tax-efficient mutual funds for your taxable portfolio; you can also use ETFs which are traded like stock so you only have to report gains when you sell. If you buy individual stocks, you only pay gains when you sell the stock, not every year.

In an ideal situation, if you buy tax-efficient index funds or ETFs, you are only taxed once on your base income and once on the gains.

Having said that, I do agree with fully funding retirement funds (based on what one can afford), by the way, simply because of tax benefits now (and possible smaller rate in retirement). But in terms of which part of one’s total retirement and non-retirement assets to allocate to stocks and bonds, it does make sense to keep higher percentage of stocks in non-retirement assets than in retirement assets.

I’m not going to abandon my Roth IRA or 401k anytime soon. I mean tax free is tax free, and these types of accounts probably won’t be around forever anyway. Though when I’m no longer elligible for a Roth IRA (which I hope and assume will happen eventually), I will certainly begin investing in a Traditional IRA-or add some Traditional tax-deferred savings to my 401k. I already have much more in taxable index funds than in either type of retirement account, so maximizing tax free and/or tax deferred savings is the best choice for me in any event.

Thanks for all the comments!

a. tax rates would have to rise significantly in order to make it not that way (and who’s to say that capital gains rates won’t increase by even more given their current historical lows)
b. automatic savings in a retirement plan actually means money goes into an account instead of planning on saving “what’s left”
c. you can’t get at the money without significant pain, which is a great disincentive from you buying a car with your Roth money.

Meg, you can invest in almost any normal “investment opportunity” within a Roth or retirement plan as well. Don’t have to necessarily have the money in a taxable account.

I contend one of the beautiful things about retirement accounts (because of the restrictions and penalties) are they keep people from themselves.

Retirement accounts tend to perform better in the long run because people leave them alone, because they know they can’t get at them. Another reason I think these new 401K debit cards are a horrible idea (save that for another day)

I just remind myself that the single most important factor is simply how much you put away in the first place, regardless of where you decide to stash it.

This is the problem with some financial advice. It sounds good in theory, yet the author needs to check the math to understand the probability for the advice to be beneficial.

The reason for this is that regular investment account is taxed twice (once when you are paid and again on earnings) where 401(k) is only taxed once on withdrawl. Thus, on a simplified analysis, the tax on 401(k) plan needs to increase by 15% capital gains rate / 28% current ordinary tax rate for it to be beneficial (note, this is simplified calculation and ignores original contribution).

Please read http://www.myfinancialawareness.com/Topics%20Financial/Power%20of%20401(k)%20and%20IRAs.htm to see the math behind the numbers (using more complete examples).

Plus, if you put your money in a retirement plan, it is protected from bankruptcy and I believe from eligibility for your children’s college financial aid.