I keep running into people who are distressed because they aren't eligible for tax sheltered retirement accounts- they don't have a 401k plan at work, for example, or they're ineligible for an IRA.

I decided to do an analysis to see just how bad these people have it.

Assumptions: $100,000 investment growing at 8%/year for 25 years, then 100% withdrawal. LT cap gains rate=15%, regular income tax rate = 25%.

Person A can and does invest 100% of his $100K in an IRA or 401k. He ends up with $475,589- not a dime is paid in taxes until withdrawal.

If the 100K goes into a taxable account, you lose $25,000 off the top, and pay a 25% tax on short term/interest gains the year you incur them. Person B makes such investments, and pays the regular tax rate on 75% of his gains each year. After 25 years, he winds up with $323,418.

A dramatic difference, but then Person B didn't manage his investment gains very well. Person C does, however- he takes a $3000 tax loss against his ordinary income each year in capital losses, and doesn't pay a dime in cap gains taxes (he matches his losses against his gains) until the end of the 25 year period. He winds up with $458,063.

Conclusion: A tax sheltered account is better than any taxable account. But potentially more important than account type is how you manage your taxable gains.

Nick