[TLC]

Don't forget to factor in taxes for dividends and capital gains distributions on the taxable account scenario. In the tax deferred account, keeping all of those and having them work for you increases your returns significantly over time.

If you never sell the index fund until you retire (that's an iffy assumption over a 40 year period), I suspect that the two scenarios are pretty equivalent. If you just swap the index fund once in that 40 year period for another one (e.g., the fund closes down, etc.) and have a decent capital gain, the equivalent, after-tax portfolio values would heavily favor the tax-deffered scenario even though it would be treated as ordinary income.

I encourage you to spend 5 minutes in a spreadsheet playing with the numbers. You'll need to make assumptions like whether the spread between the capital gains and ordinary income tax rates will widen from the current favorable situation, etc. The Vanguard 500 index fund has had an after-tax return "hit" of about 0.5% per year over the last 10 years. That assumes a high tax bracket, so you could tame that down a little if you want to 0.4%.

Another thing to consider is the investment choices in your 401k. If they are vastly inferior (i.e., high expenses) to what you would use in a taxable account, then that may sway things a bit towards the taxable account. Although with the way people jump between jobs these days, that may be a moot point as there will probably be several opportunities for you to transfer the funds to a self-directed rollover IRA.

Good luck with your decision.