Whether to invest into a regular IRA and tax-advantaged employer plan accounts versus investing in “Roth” tax-advantaged employer plan and IRA personal accounts is not always a straightforward decision.
The decision on the alternatives is one of the very intricate decisions of do-it-yourself financial planning. A lot of things can decide whether a traditional tax-advantaged employer plan or IRA retirement account contribution versus a “Roth” IRA or tax-advantaged employer plan retirement account contribution choice would be optimal.
In most circumstances making further investments into a regular tax-advantaged employer plan or IRA retirement accounts is the best decision, when those contributions would be currently tax deductible.
The trade-offs are complex. Rules-of-thumb are not able to model all the important factors. The decision is not just about present versus future tax rates. Instead, the choice needs a comprehensive financial projection and valuation of an investor’s lifetime expenses, debts, net assets, and taxes.
(Here is where you can find a comprehensive Roth IRA versus traditional IRA calculator that fully automates this ordinary tax-advantaged employer plan or IRA personal account versus Investing in Roth tax-advantaged employer plan or IRA personal account financial projection.)
Whether or not someone will save enough to invest carefully across a lifetime dominates the Roth retirement account versus the “deductible against current income taxes” traditional retirement plan contribution choice.
When a family cannot make enough money, does not save aggressively, cannot strictly control investment costs, and/or does not grow a large enough retirement nest egg, then that person won’t be in high income tax rates in retirement — whether or not state and federal tax have changed in the interim. If a family does not have sufficiently large assets and income in retirement, then the current tax advantage an investor will get from deciding on an ordinary retirement plan contribution will tend to be more economically advantageous over a life cycle.
Note: This article ONLY talks about personal financial circumstances where an investor can choose between a “deductible against this years income taxes” regular IRA or 401k additional investment versus a currently “non-deductible against this years income taxes” Roth IRA or 401k contribution. If you cannot get the current tax deduction but have available a Roth contribution, then the Roth deposit is best.
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