Let’s take, for instance, a semi-elderly couple that owns their home and whose car has just crapped out. They need a new one, so they are wondering how to pay for it…

If they have money in taxable accounts, they can take that money out and buy the car with no tax implications (because in a taxable account, even with reinvested dividends, they’ve been paying tax on some of the gain all along via 1099-DIVs although they’ll still get a -B). Plus, if they are heading for death (as we all are), there aren’t a ton of great ways to ensure your heirs get the piles of cash you have lying around in regular accounts.

If they take money out of a tax-deferred investment, they will have to pay tax on the entire amount that they take out. They’ll get a 1099-R stating that 100% of that was income. For me, I inherited a traditional IRA and I have to take out 1/(83-my age) of it every year. Let’s just say that I won’t be touching the principal amount for at least another decade. Clearly, in this case, selling a mortgaged property and getting this IRA inherited was better than paying off the house and paying tax in one fell swoop on all that income.

With a Roth, to be honest, I don’t plan to ever touch mine. I plan to leave it (although the kids hopefully won’t need it either). But there is no tax on anything in it (forever at this point), but as soon as I take it out, unless I spend it, wherever I store it, I’m paying tax on what it’s earning.

Of course, there is always some luck that the tax code doesn’t change to benefit the lowest common denominator while screwing the people that found the best way to work the older system.