401Ks and other registered plans are not always the best retirement savings vehicles
Disclaimer: I am neither an economist, nor a registered financial planner. This is not investment advice.
The 401K and other registered vehicles operate under the assumption that future tax rates will be much lower than current. For many, especially comparing income while working to that during retirement, this may be a reasonable assumption.
But consider relatively younger or middle-aged folks with long investment horizons. With a very large federal deficit, underinvested social welfare, and baby boomers leaving the workforce, we seem aimed at a time in which overall tax rates must increase, possibly a lot, in order for the government to continue to deliver social services. If my retirement horizon were 5 years or so this will probably not make much of a difference. In that it is around 20 years, I’m not so comfortable that my marginal tax rate will actually decrease in retirement.
Another factor is deductible mortgage interest. Living on the San Francisco peninsula I have a rather high mortgage (for a modest house, thank you). Itemizing my deductions against income and working through my return, my marginal tax rate drops pretty dramatically despite having a pretty decent income. In retirement I hope I won’t have this high mortgage, but that really means that I won’t have artifically depressed tax rates either.
Add it up. The assumption underlying registered plans such as a 401K are not guarateed to hold. In fact, I'd say they are unlikely to hold for many who are currently working.
In fact, were the US federal government to show any signs of thoughfulness, I might imagine they designed 401Ks with these issues firmly in mind, and that they consider 401Ks an annuity they've purchased in today's dollars to help fund social services in the future.
It may still make sense to invest in a 401K, especially if your employer matches your contributions. But I’ve been directing a good portion of my long-term savings to non-registered plans. YMMV
The usual advice now is to max out your Roth IRA contribution (contribute
after tax dollars, returns and withdrawals are tax free) before you make
any contribution to your 401K that isn't matched by your employer. You
should also consider maxing out other tax favored accounts, like the
education accounts, before contributing to 401K's or traditional IRA's.
Regular IRA's and 401K's suffer from the tax issues you mentioned.
So what do mean by non-registered plans? I'd be interested to hear your
thoughts on this...