ooeei -- thanks for the long, considered answer. I appreciate the thought you put into it, but I think at the core, there are some misconceptions...
Sorry all, but I am removing the quotes / linking / assigning who said what, to try to get to the core and shorten this up a bit... the authors below are likely wrongly referenced!
Based on this logic, we should be encouraging everyone to buy houses too, because for many people the house payment is a forced savings plan that they'd otherwise blow on stupid stuff. Here's my math to prove it.
With house: $400k house as asset after 30 years. You pay the mortgage monthly, and would be paying some for rent anyway, so you don't really notice it.
Without house: $0 after 30 years. You spent the money on stuff and rent.
Yes, I think that this is what really happens to many people, especially for the first 10-15 years of home ownership. It is hard to quantify, person specific (MMMs excluded?); which is why we don't quantify it, but it really does exist.
You are simplifying the math against the benefits of tax advantaged accounts, assuming the person is not disciplined enough to invest the extra from not paying taxes.
Actually, the math I have shown is that the full pretax amount ($100k) is invested into the 401k, direct from paycheck which does not generate an additional tax refund, and assumes that the investor has adjusted pay to have no refund at year end, even after the 401k contributions.
I think it's this part of the post I bolded that bothered people, because it is demonstrably false:
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Quote from Goldielocks:
This is not true. If you are in the same tax bracket, it is the same money out as if you invested it in a non Retirement account- (shows basic math - see upthread for details)
ooeei -- Please demonstrate to me that it is false.
There is another excellent discussion chain on this, but the essence is that you compare the taxes as marginal to marginal (as you will likely have other income like SS) that is taxed first.
My other points on tax loss harvesting, paying the dividend taxes as you go, borrowing to invest, etc. are just nice points if you have already decided to carry a non-taxable account. They are there to show the complexity and highlight more advantages to having both a 401k and a non-taxable account.
I did not build these advantages into my basic math comparing 401k taxes to non-registered taxes, because they are very person-specific, and should only influence decisions when you have a large enough amount to make it worthwhile.
My take on 401k's advantages:
1) Employer matching
2) Reduced taxes if your top marginal tax bracket in future is lower than today. The 401k can be quite large before you need to be concerned about this!
3) Easy to set up and pay the full amount of Pre tax dollars, direct from paycheck, without risk of spending your refund.
distant 4th) Defer paying taxes -- you may die before you pay your taxes, and only your estate needs to.
distant 5th) Easier to file taxes if all your investments are wrapped inside a 401k instead of taxable / trackable each year. Don't have to pay taxes as you go, etc.
For tax advantaged income investments, like capital gains and dividends, 401k's are less advantageous, (if you have no drop in marginal tax rate), as you actually eventually pay
tax on capital gains and dividends as if they are earned income when you withdraw them-- a 401k removes their underlying tax advantages.
NOTE This is only a factor when choosing what to put in non-taxable vs taxable accounts vs Roth... does not apply if you only need a matching 401k and Roth account -- don't worry about the differences, which are minor at lower levels.
I hope this helps...
TLDRWithout a match, 401k's are not stunningly fabulous devices, rather they are just pretty decent pension / saving vehicles for
deferring taxes to retirement years, and for moving income from high tax to low tax years.
Roths, HSAs, etc, all have even nicer features than 401k's, but lower limits (typically).