I think this dead horse has been beaten enough, but let me kick it from a different perspective.
Even if you do maximize your tax-advantaged accounts (401(k), IRA, HSA, etc.), plain old taxable investment accounts can also have significant tax advantages for people of moderate incomes.
Under current tax law, if you are in the 15% tax bracket or lower, the Federal income tax on
long-term capital gains is, get ready...
0%
Also, if you are in the 15% tax bracket, the Federal income tax on
qualified dividends, which is what most of your 2% - 3% annual dividends will be if you hold a total US or total international stock market index fund in a taxable account, is, get ready for it, I hope you're sitting down when you read this:
0%
So, if you're a frugal, low-income, FIRE type of person in the 15% Federal tax bracket, lets compare and contrast the tax rates on Roth IRAs and a taxable investment, both of which are after-tax investments:
Account | LTCG Tax Rate | Qualified Dividend Tax Rate |
Roth IRA | 0% | 0% |
Taxable investment | 0% | 0% |
Now let me get out my calculator to see which is better...hang on a minute...they are the same!
What this means is that, if you're in the 15% tax bracket or lower, if you do a few things right, then the gains on your investments are tax free...just like a Roth IRA. E.g. you buy 100 shares at $10/share for $1,000, and they rise to $20/share so your investment is now $2,000, you won't have to pay taxes if you realize that $1,000 gain. Similarly, the taxes on qualified dividends, which can significantly erode your gains compared to a tax-sheltered account, are $0 if you keep within the 15% tax bracket.
If you are in the 15% Federal tax bracket, you can "tax gain harvest" enough every year (assuming the value of your funds is rising, which we can hope it is over the long haul) up to the top of the 15% tax bracket so that you continuously reset the basis of your stock holdings to keep your LTCG low, thereby helping keep your in the 15% bracket when you do need to sell stock funds for regular income. See
Reset Cost Basis Higher By Realizing Capital Gains for more.
And in years where the stock market goes down, you can tax-
loss harvest which lowers your taxable income by up to $3,000 per year, and if you take a $9,000 loss in one year, you can spread that loss out over three years at $3,000 each....or if you take a $90,000 loss, you can spread that out over 30 years at $3,000 each, etc. etc. That's a benefit you
can't do in tax-advantaged accounts.
Now, all that being said, what is written above applies to Federal taxes. You will pay state income taxes on these gains and dividends, if you live in a state with an income tax. But state incomes taxes are usually less than Federal.
I agree with all the other posters who say that we have an income tax in our country to pay for our government, so by default if you make income you should pay taxes on it. Now, we also want to reward savings, to a degree, so we let ourselves pay a little less taxes for certain types of long-term savings. But even if you take full advantage of those tax-advantaged retirement savings, there are still tax benefits to investing for people with moderate incomes.