Diversifying account types the way you would a stock portfolio will likely prove to be the best long term bet.

For instance, if you live in California (high income tax) but plan to retire to Nevada (no income tax) a 401k may be a much better choice for you. If, however, you currently live in Wyoming, but desperately want to move to New York, investing as much as possible in the Roth until you move is probably the better choice.

The idea that you’ll make less in your 60s or 70s no longer holds accross the board. Pension + social security + investments + part or full time work, it’s not so hard to imagine anymore.

Everyone seems to think its a given that taxes are going to go up in future decades because we have a large debt. That seems like common sense. But ask yourself when has that ever happened? When have our politicians sat down and all agreed that they should be responsible and raise our taxes because the national debt is too high? It hasn’t happened in my lifetime. It didn’t happen in the 40’s and 50’s when our debt was > GDP like it is now. I don’t think our politicians are going to spontaneously become financially responsible long term thinkers. If you look back 60 years the tax rate on median income households has not changed much even though the national debt has been up and down significantly. If you plot the national debt and tax rates over the past 100 years theres really no correlation between the two. Don’t assume taxes will go up simply cause our debt has.

I don’t recall the exact dollar amounts, but there is a difference in the amount of money which can be shielded from creditors for the different types of accounts. If I’m not mistaken, a creditor can’t touch a 401(k) at all, but there is a dollar limit on IRAs of all types above which a creditor can seize your assets.

Don’t think that only irresponsible people declare bankruptcy or have massive legal claims against them. A court judgement in excess of one’s umbrella liability policy can do this, as can a catastrophic medical situation that overwhelms one’s health insurance limits.

Another reason to favor a tax-advantaged account such as a 401(k) is that your Modified Adjusted Gross Income (a specific IRS term) will be reduced by the gross amount of your 401(k) contributions. This reduction in MAGI will increase financial aid eligibility for you and your kids. More grants, fewer loans. Also, retirement accounts of any type are not considered as assets when financial aid is calculated. Another reason to max out 401(k)s and IRAs before ever putting a penny in a 529 plan.

Remember, your kids can get grants and loans for college, you can’t get grants and loans for retirement!

Can you skip the psuedo-political analysis by criticizing the Reagan years? Taxes low = tax revenue high – it’s an empirical truth. Look at the great state of MI to see how increasing taxes decreases prosperity.

One of JFK’s key economic plans included massive, across-the-board tax cuts, similar to those of Reagan. Much like the 1920’s and 1980’s, it was these tax cuts that led to the Golden Kennedy-Johnson years.

By my math, it still looks like the retirement account – particluarly the Roth – comes out ahead.

With the Roth, you get your original contributions tax-free, and pay a 10% penalty on earnings. With the taxable account, you pay no tax on your original contributions, but pay a 15% tax (in most cases) on capital gains.

Plus, with the Roth, your original contributions come out first, whereas with the taxable account, you must take them out together, so you get hit with taxes from the start.

Plus, with the taxable account, you must pay income tax every year on stock dividends and bond interest at your full marginal tax rate, so your money will not grow as fast as it will in a Roth, where those things are tax free.

Plus, with the taxable account, there’s a tax consequence if you want to rebalance your portfolio, whereas with a Roth, there’s not.

What am I missing?

Let’s use your example of a $50k contribution that you expect will double between now and retirement. With a Roth, you pay taxes now, which reduces your contribution to $37,500, which grows to $75k, which you can then withdraw tax free. With the traditional account, you contribute the whole $50k, it grows to $100k, you pay $25k in taxes (you actually pay less than this, because of what I said earlier about tax brackets, which is a separate issue from what you’re talking about here) and keep $75k. Same thing.

Now, if your reason for wanting to pay less in taxes is because you want to stick it to the government and give them as little money as possible, then that’s possibly an advantage for the Roth – although there’s the time value of money to take into account. Also, a far more straightforward way to pay less in taxes is to earn less money. But if your reason for wanting to pay less in taxes is because you want to keep as much money as possible for yourself, then it makes no difference whether you pay 25% now or 25% later.