This is an amalgam of two articles that ran in 2002 and some recent thoughts. Since we still see many questions on this topic, we figured it was time for an update.

There's nothing like a boisterous debate about retirement accounts. (A smackdown over lawn-mowing techniques is a close second.) A few years ago, I wrote an article about a study which suggested that many investors would be better off saving retirement money in places other than their employer-sponsored retirement accounts. The article inspired more than a few readers to send some thoughts via email and prompted an enlightening conversation on The Motley Fool discussion boards. These folks raised so many good points that I thought it would be worthwhile to take a closer look at the question of how much of your investments should go in 401(k), 403(b), 457, SIMPLE, or SEP (always remembering to XYZ, PDQ).

First, permit me to reprint the first few paragraphs of the original article:

When it comes to saving for retirement, many Americans first turn to their employer-sponsored plan. However, in a recent BusinessWeek article, economists Laurence J. Kotlikoff of Boston University and Jagadeesh Gokhale of the Federal Reserve Bank of Cleveland claim that many investors would have more money in retirement if they contributed to accounts other than 401(k)s.

Their primary reason: Withdrawals from 401(k) accounts are taxed as ordinary income, instead of at the lower rates of long-term capital gains. Not only does this reduce the after-tax benefit of a 401(k), but it might push retirees into a higher tax bracket and thus subject more Social Security benefits to taxes.

If your employer matches your contributions to your retirement plan, you should contribute at least as much to take full advantage of that free money, according to Kotlikoff and Gokhale. After that, you're probably better off putting your money elsewhere, preferably a Roth IRA if you're eligible. Implicit in this argument is that, if your employer doesn't offer a match, you should contribute the maximum amount to a Roth IRA before even considering another option.

Thanks to the miracle of modern technology, many readers were able to take time out of their workday to provide instant feedback, via email and discussion boards. Some of the comments I received were about my article, some were about the Kotlikoff and Gokhale study. Most of them could be summed up by the following statements.

"You didn't mention that contributions to 401(k)s are made with pre-tax money!"
True enough. When money is transferred directly from your paycheck to your 401(k), Uncle Sam doesn't take any income taxes (though the Social Security Administration still snatches its share). This can result in some sweet savings. For example, a worker who is in the 28% tax bracket will pay $280 less in income taxes for every $1,000 contributed to her 401(k). This is a significant factor to take into account when determining whether your retirement savings should go into a 401(k), traditional IRA, Roth IRA, or elsewhere.

Believe it or not, the BusinessWeek article found a drawback to the income-tax-free status of 401(k) contributions: Less taxable income could drop you down a tax bracket, which would devalue the benefits of other tax deductions such as mortgage interest.

"Putt ing retirement money in a taxable account when you have a tax-advantaged option is bunk!"
Kotlikoff and Gokhale argue that a good portion of savings should go into regular taxable accounts. In fact, according to their study, some people shouldn't contribute to a 401(k) at all, such as a couple who are both 45, have a combined income of less than $250,000, and have been contributing 13.5% of their incomes to a 401(k) for 20 years.

It is presumed that, besides contributing to a Roth (if eligible), such investors should buy the stocks of high-quality companies. Just hold on to these companies for years and years, then pay the 5% or 15% capital gains rate when you sell in retirement, instead of the ordinary income rates that retirees will have to pay on withdrawals from 401(k)s and traditional IRAs.

Well, this got a few pots a-stewin'. Here's what one Fool Community member had to say:

These "experts" are working from untenable assumptions. They assume that portfolios should be grossly stock-heavy, they assume no one will ever sell or rebalance, and they assume people will gradually drip money out of stocks during retirement.

That about sums it up. If you will be in a higher tax bracket in retirement, and you won't incur many taxes along the way to retirement (because you won't sell your holdings or invest in income-producing securities), it's possible that buying and holding a stock for 20 years will work out better than investing in your 401(k)'s mutual funds. But are those realistic assumptions? Hardly.

However, if you are nearing or in retirement and you'll need some money within five years or so, then it might make sense to keep new stock purchases out of a 401(k) or Traditional IRA. Holding on to one stock is a much more realistic proposition with such a shorter timeframe. And when you sell the investments, you'll pay the long-term capital gains rate, as opposed to the ordinary income tax rate on retirement account withdrawals.

"My biggest complaint about my 401(k) is the lack of flexibility. My only investment choices are a bunch of lousy mutual funds."
Yes, 401(k) investors are held captive to their fund choices. We're vigorous proponents of index funds, but they're not very exciting if you have the talent to beat the market. If you think you've got what it takes, Hot Shot, then definitely lean toward an IRA since you can buy individual stocks. But keep your active trading out of regular accounts; the taxes will kill ya.

Another Fool Community member brought up a couple of other restrictive characteristics of 401(k)s: "You have to start taking the money at age 70 1/2 whether you need it or not [unless you're still working], and you can't pass the capital gains to your heirs untaxed." Those are worth keeping in mind -- and laws worth monitoring. Estate tax law changes constantly, and some congressfolks have proposed doing away with required distributions.

"Finally someone speaks the truth! People who contribute to 401(k)s lose the ability to deduct capital losses!"
I got an email from an accountant who said that 401(k)s and IRAs are a bad idea because if you sell a security for less than you paid for it, you can't deduct the loss. Originally, that seemed awfully defeatist to me: Invest for growth, but choose the account that will provide the most benefit in case of a loss. If you find that, over the long term (i.e., longer than the last few years), you're seeing so many losses that it would be better for you to be in a taxable account, perhaps you should evaluate your investment strategy.

That said, we all pick stocks and funds that don't do well; it's just a part of investing. And being able to offset gains or income with those losses is the consolation prize. However, you generally can't use losses to reduce taxable income if the investments are in retirement accounts. (That's also why asset location -- where you put your bonds and where you put your stocks -- can be just as important as asset allocation. For more on this topic, check out past issues of my Rule Your Retirement newsletter, which you can peruse for free by clicking here.)

"You never call me!"
That one came from my mother.

The moral of this story
You've heard it before: Everyone's situation is different. There are few maxims of money management that apply to everyone. Generally, though, everyone should take full advantage of employer match, then decide the 401(k) vs. Roth dilemma for unmatched contributions. Smart tax planning can add quite a bit to your nest egg, as can these other 7 Ways to Retire.

Robert Brokamp contributes enough energy to his job to get the full employer match, then puts the rest into large, sweaty, smelly men whom he's never met yet still influence his well-being (i.e. fantasy football). He is the editor of the Rule Your Retirement newsletter service -- try a 30-day free trial by clicking here. The Motley Fool is investorswriting for investors.