/biz/ - Business & Finance

Are tax-advantaged retirement accounts an inadvertent trap? To my understanding they are subject to state and local income tax, social security tax, and medicare tax one way or another. By contrast a taxable account with qualified dividends or else one in which the investor holds for over a year is subject to and only to the long term capital gains tax.

A taxable account seems to give complete freedom with your money and is taxed at lower rates and less taxed at that. What am I missing?

Here's my situation. First I have a 401k that pays $10/hr regardless of my personal contributions. None of that comes off of my paycheck.

Second I recognize that this might give me some freedom with my other investments. My question pertains to the point of a taxable brokerage account versus a tax-deferred account.

One thing I did notice is that IIRC all withdrawals from a 401k or IRA are taxed as income as are contributions to Roth IRAs. On the other hand taxable accounts can be subject to long term capital gains taxes which seem significantly less than how money is taxed going into or out of a retirement account. With a mere 15% tax on dividends or realized capital gains after a year of holding how much advantage do I really get out of a tax-deferred account? It sounds like an oversimplified sales pitch for what amounts to a trap.