Like all good questions the answer is\u2026it depends, but this one has a pretty clear winner most of the time. \r\n\r\nLargely this question revolves around the impact of taxes and the ability to compound money early and often. \r\n\r\nIn a 401k or stocks and mutual funds plan, every dollar of your allocation is deductible on a federal and state basis. When you invest directly into equities (stocks) in a non-retirement account, you are investing after tax dollars.\r\n\r\nA 401k plan is an employee sponsored plan that is tax sheltered. \r\n\r\nWhen you contribute money as part of your weekly/bi-montly/monthly pay cycle that money goes directly into an account and no taxes are withheld on the allocation. \r\n\r\nThat is an incredibly impactful factor in that your money has an opportunity to compound without the negative effects of taxes. \r\n\r\nCompounding money early in life, and avoiding taxes have a significant impact on your final net worth. More to come on this later.\r\n\r\nFree Money\r\n401k money invested well | 401k or stocks and mutual funds\r\nThe second benefit of a 401k is that often an employer will contribute above and beyond your allocation. \r\n\r\nThis is considered an employment perk and is also an employer\u2019s tactic to help encourage retirement savings. \r\n\r\nA specific example of this is that if you were to decide to invest 5% of your pay to a 401k, an employer will often match the first 3%. \r\n\r\nIn essence, this is additional pay, and again will go into your account without tax withholding. \r\n\r\nThis specifically started to become the practice once fixed income retirement plans (pensions) started to fall by the wayside. \r\n\r\nOut of guilt, out of obligation, or something else, it is commonplace to see employer\u2019s contributing directly into 401k plans.\r\n\r\nTime Matters When Making The 401k Decision\r\nSavings of Median Households in the US for retirment\r\nThe longer you can wait to withdraw invested funds will shift your preference to using a 401k account; at least, until the very end. \r\n\r\nIf you are going to need your funds before the age of 59 \u00bd, you will have to both pay taxes and an additional early withdraw penalty\u2013that\u2019s very hard to make up. \r\n\r\nHowever, if you will need the money earlier it will often make sense to take the tax hit, invest conservatively, and invest in an after-tax account. \r\n\r\nThis can be modeled pretty simply but the high level take away is immediate and near-term needs should be invested in taxable accounts and beyond that go with the 401k.\r\n\r\nQuality Of The Plan Plays A Role\r\nDollar Worth With Age\r\nSome of the plans that I have reviewed over the years are simply terrible. \r\n\r\nThey contain only fixed income funds with low returns, or they have annuities with massive service fees. \r\n\r\nIt will be very difficult to compound returns in these environments even with the benefits of pre-tax dollars and free money from your employer. \r\n\r\nIn these extreme cases, it may make perfect sense to invest outside of a 401k. \r\n\r\nIf you are going to go this route you will need to keep a long-term perspective and have a heavy lean to stocks vs. bonds to overcome the friction of tax. \r\n\r\nIn fact, this is where it makes the most sense to invest in low-cost index funds with reduced tax exposure. In our buyer\u2019s guide we have recommendations that will provide specific fund and stock recommendations. \r\n\r\nWhat Are The Right Stocks To Outperform A 401k\r\nTop Tech Stocks 2009-2019\r\nDepending on the time horizon described in our considerations above it will put us on a couple different paths. \r\n\r\nWhen the need for funds is near-term, we should leave the funds in the most conservative fixed return funds where our primary objective is capital preservation. \r\n\r\nWhen we have a longer time horizon (plus 5 years) but will need the funds prior to our 59 and \u00bd birthday, we\u2019ll want to shift to low cost index funds but will want to shift the portfolio heavily towards stocks/equities. \r\n\r\nGoing longer-term, we will want to push for more aggressive risk/return because we have a longer time period for the risk premium of stocks to be realized. \r\n\r\nHowever, as a default rule stick to low cost index funds and turn your focus to increasing contributions by reducing your living expenses.\r\n\r\nWhat Are The Right Stocks To Outperform Inside A 401k\r\nStok Screening Tools\r\nInside a retirement account, I\u2019m always looking to maximize dividend yields while remaining cognizant of individual equity risk. \r\n\r\nThe perfect candidate would distribute a high monthly yield but have a strong balance sheet and a conservative distribution coverage ratio (I\u2019ll address this further in another post). \r\n\r\nI like to have a high monthly or quarterly yield inside my retirement account so I do not have to pay taxes on these distributions. I\u2019m also a big fan of having the cash now rather than trusting a company to return it when it benefits them. \r\n\r\nInside my retirement accounts I\u2019m trying to maximize monthly dividends without exposing my portfolio to unneeded risk. \r\n\r\nWhen mining for these stocks or funds I use a bottom-up approach where I\u2019m selecting the 50 best candidates. \r\n\r\nOnce I have the equities selected I will monitor exclusion criteria and will quickly kick a stock out of my preferred list. \r\n\r\nNext, I will monitor both the dividend yield, and will be looking up these candidates when their price takes a hit. \r\n\r\nThere are several stock screening tools available and the principles listed above are critical to building a strong retirement account, and a secure future.\r\n\r\nConclusion\r\nIf you do not have an immediate or near-term need for your funds, it almost always makes sense to invest the funds inside a 401k or stocks and mutual funds. \r\n\r\nOnly when the options inside that fund are very poor or too conservative would it make sense to avoid the tax and employee matching contribution. \r\n\r\nIf you are going to invest outside of a 401k you should try to ensure the stock or fund is tax efficient (holds equities beyond 1 year and how low turn-over), and you should allocate funds heavily towards equities (versus bonds) so you can overcome the friction of taxes. \r\n\r\nThere will be additional posts that provides the specifics on stocks but the above principles should serve as your foundation.