When saving for retirement, which plan is better, the taxable non-retirement account or the defined contribution retirement plan? While tax-sheltered retirement plans offer the convenience of automatic investments and tax breaks, the tax efficiency for investors’ non-retirement accounts over the years has improved. Plus, not all 401(k) plans are created equal.

Morningstar’s director of personal finance Christine Benz notes that, when considering 401(k) plans, it’s important to consider said plans’ availability and quality. Some jobs, for example, may not have an employer-provided retirement plan, and even the ones that do can vary in quality. While Benz describes some 401(k) plans as “gold-plated,” she points out that others have high administrative costs, insufficient employer matching contributions, and inferior, expensive investment line-ups. These negatives can detract from a 401(k) plan’s tax-saving benefits.

Meanwhile, broad-market equity ETFs have significantly reduced the tax drag for taxable accountholders, simulating the tax deferral that comes with investing in a 401(k). Many robo-advisors use other methods to reduce the tax drag on investors’ taxable accounts, such as selling losing positions to offset gainers elsewhere in the portfolio. That could reduce the capital gains taxes on positions once they’re liquidated.

While investing in taxable accounts has become more appealing, investors should still put enough in a 401(k) to earn matching contributions. If the 401(k) plan is weak and they have additional retirement assets to invest, they should opt for an IRA rather than steer more money to the poor 401(k) plan.

“But what if they have additional retirement assets to invest?” asks Benz. “Once the IRA is fully funded, would those dollars be better off in a weak 401(k) or in a brokerage account held outside of a tax-sheltered account?”

The answer depends on a couple of key factors, including the 401(k) plan’s quality, the quality and tax efficiency of the investments in the taxable accounts, the investor’s tax bracket at the time of the contributions, and the tax bracket at the time of withdrawals.

Since all these factors work together, there’s no one-size-fits-all answer to whether to invest in a 401(k) or a taxable account. When deciding which account types to fund, investors should weigh their own personal tax situations, as well as the quality of their 401(k)s.

“That underscores the virtues of tax diversification—splitting assets across accounts with varying tax treatment, whether tax-deferred, taxable, or Roth—when saving for retirement,” writes Benz. “It also illustrates the value of taking a deliberate approach to Roth versus traditional tax-deferred account funding.”

For advisors looking for retirement income options for their clients, Nationwide offers a variety of actively managed ETFs for advisors that cater to a range of investment exposures and strategies within the major indexes.

For more news, information, and strategy, visit the Retirement Income Channel.