Here's an example to perhaps make it clearer. From 1993 to 2013, the S&P 500 returned 9.1% annually and long-term treasuries returned 5.4%. Let's assume the most pessimistic case for tax efficiency: that the gains on bonds are taxed every year and for stocks there's no taxation until the end (I know this isn't true because of dividends, but it makes the math easier and it's an even more extreme case than reality). Now, let's invest $10,000 in each and look at two cases:
1) Bonds in Roth IRA, Stocks in Taxable:
$10,000 invested in bonds in 1993 becomes $28,600.
$10,000 invested in stocks becomes $57,100 before taxes, but assuming a 15% capital gains tax, becomes about $50,000 after taxes.
Total: $78,600
2) Stocks in Roth IRA, Bonds in Taxable:
$10,000 invested in stocks becomes $57,100.
$10,000 invested in bonds becomes (assuming, let's say, a 25% tax bracket) $22,100
Total: $79,200
Now, in this case there's not much of a difference, but that's because the difference in returns between stocks and bonds over 20 years is one of the smaller ones in history.
