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I wrote that although a deductible IRA should outperform a taxable (non-IRA) account because it provides deferral, a taxable account can outperform a nondeductible IRA under certain assumptions because the IRA converts capital gain into ordinary income. Pixy responded:

<<As long as the new capitial gains rates continue, it's definitely food for thought. It pertains to both non-deductible traditional IRAs and 401k contributions beyond the employer's maximum match.>>

I think that's a little misleading. Making a 401k contribution beyond the employer match is roughly equivalent from a tax standpoint to making a contribution to a *deductible* IRA, so it shouldn't be equated to a nondeductible IRA. With equivalent investment performance, the 401k should beat the taxable account because of the deferral the 401k provides. The taxable account may win versus the 401k for a different reason, though: many 401k plans offer lousy investment alternatives, so you may feel that it's appropriate to project a higher return for your taxable account. And that higher return, together with the conversion of capital gain into ordinary income, can produce a better overall after-tax return in the taxable account than in the 401k.

KAT in Chicagoland
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