Background about me: I am a foreign national living in the United States. I am in my late 20s, and have begun thinking about long term investing. Having read Get A Financial Life by Beth Kobliner, I understand pretty clearly the benefits of tax-advantaged accounts like IRAs, Roth IRAs, etc. The problem is that my medium term status in the United States is uncertain: I do not have permanent residency, and may, in a few years, return to Europe. It seems that in my situation tax-advantaged retirement plans are a risk: if I stay in the US long term, they will be extremely beneficial, but if I leave the US in a few years I could lose significant investment gains from withdrawal penalties.
The issue: the benefit of tax-advantaged plans is that they increase your growth rate slightly (maybe 1% or 2%, from not having to pay tax on your gains), but because of compounding this small 1% or 2% change results in huge increases in your investment over the long run.
But, on the other hand, I have read that passively managed index funds (like Vanguard Total Market Admiral VTSAX) actually do relatively little trading (they have low portfolio turnover), so even though the value of your investment is increasing all the time you're not paying that much capital gains or income tax. In the absence of long term residency certainty, it would seem to make sense to place my long term investments in such funds rather than an IRA. While I still would have to pay some tax yearly, it should be relatively low, and so the total loss from not having an IRA would not be gigantic.
Does my overall reasoning here check out? Or do the taxes on index mutual fund gains still tip the scales towards an IRA in my situation?
Can you give a ballpark figure of about what percent of the gain on a passively managed index fund will go on tax? If the fund goes up by 10%, how much of the 10% is lost on tax? Capital gains is 15%, which would give 1.5% loss, but as I said, it seems that you don't pay tax on all the gains as relatively few taxable events occur within the fund. If someone had personal experience with this and was willing to share, I would love to hear it.
(Alternatively, I'm not put off by the idea of drilling through a mutual fund prospectus or annual report to make the calculations myself as I have a quantitative background. I just wouldn't know where to start. So some advice on how to use the prospectus and annual report to make the calculations would be very gratefully received!)