Finance Rock Paper Scissors: The Circle of Tax Advantage

In the playground of personal finance, people love to argue about the “ultimate” investment account.

• “Roth is King!” screams the young influencer.
• “Defer taxes forever!” shouts the high earner.
• “Liquidity is power!” says the real estate investor.

The truth is, investing is just a high-stakes game of Rock, Paper, Scissors. No account wins every time. Each one has a specific weakness that another account can exploit.

Here is how the game is played, and how you can win by holding all three “throws” in your portfolio.

The Throw Down

The cycle of dominance usually flows like this:

1. Traditional 401k beats Roth IRA (The High Earner’s Move)
2. Roth IRA beats Brokerage (The Growth Move)
3. Brokerage beats Traditional 401k (The Legacy Move)

Rock: Traditional 401k/IRA

Strength: Immediate Tax Deduction (Tax Arbitrage)

Why it Beats the Roth

If you are in your peak earning years, you are likely in a high tax bracket (24%, 32%, or higher).

When you choose a Roth, you are choosing to pay those high taxes now to lock in tax-free growth. That is expensive.

When you choose a Traditional 401k, you avoid that 32% tax hit today. You invest the pre-tax money, let it grow, and withdraw it in retirement when your income—and tax bracket—is likely much lower (e.g., 12% or 22%).

The Math: Saving 32% today to pay 12% later is an instant, guaranteed return on your money that the Roth cannot beat. In the accumulation phase for high earners, Traditional smashes Roth.

Paper: Roth IRA

Strength: Tax-Free Growth & Withdrawals

Why it Beats the Brokerage

The Taxable Brokerage account is flexible, but it suffers from “Tax Drag.” Every year you hold it, you might owe taxes on dividends. When you finally sell to fund your lifestyle, you owe Capital Gains tax (15% or 20%) on the profit.

The Roth IRA wraps your money in a forcefield.

• Dividends? Tax-free.
• Capital Gains? Tax-free.
• Withdrawals? Tax-free.

The Math: If you invest $100,000 and it grows to $1,000,000:

• Brokerage: You owe the IRS roughly $135,000 in capital gains taxes upon sale.
• Roth: You keep every single penny. For pure spending power in retirement, Roth covers Brokerage.

Scissors: Taxable Brokerage

Strength: Step-Up in Basis

How it Beats the Traditional 401k

Wait, how can a taxable account beat a tax-advantaged 401k? Death and Taxes.

This is the “Scissors” move that cuts through the 401k’s defense. It’s called the Step-Up in Basis.

If you pass away with money in a Traditional 401k, that money is a ticking tax bomb for your heirs. When your children withdraw it, they must pay ordinary income tax on every dollar. If they are in their own peak earning years, the government could take 30%+ of your legacy.

However, if you pass away with a Taxable Brokerage account, the tax rules change.

• Scenario: You bought Apple stock for $10,000. It is now worth $1,000,000.
• If you sell: You owe tax on $990k gain.
• If you die: The “Cost Basis” steps up to the value on the day of your death ($1M).
• The Result: Your heirs inherit the stock with a basis of $1M. They can sell it immediately and pay $0 in taxes.

The Math: * Inherited 401k: $1M value -> Heirs pay ~$300k tax -> $700k Net Legacy.

• Inherited Brokerage: $1M value -> Heirs pay $0 tax -> $1M Net Legacy.

For generational wealth transfer, Brokerage cuts Traditional.

Conclusion: Don’t Choose One, Choose All

If you only have “Rock” (Traditional), you are vulnerable to future tax hikes and create a tax burden for your heirs. If you only have “Paper” (Roth), you overpay taxes today.

The winning strategy is Tax Diversification.

1. Use Traditional to shave off your high marginal taxes today.
2. Use Roth to build a tax-free spending bucket.
3. Use Brokerage for liquidity and as the ultimate tax-free inheritance vehicle.

To win the game, you need to be able to throw all three hands.

Read Next

Now that you have secured your spending, let’s talk about securing your retirement from taxes. 👉 The 100k Illusion: Why Your Salary Tax isn’t Your Retirement Tax

Disclaimer: This content is for educational purposes only and does not constitute financial advice. I am not a financial advisor. Please consult with a qualified professional before making financial decisions.

These are the cards I use to secure my spending and earn the “Discount on Life.”