Whether to make further investments into an ordinary IRA and tax-advantaged employer plan accounts versus investing in “Roth” tax-advantaged employer plan and IRA accounts is not always a straightforward choice.
The decision on the alternatives is one of the very intricate decisions of lifetime personal financial planning. Many things can influence whether a regular tax-advantaged employer plan or IRA retirement account contribution versus a “Roth” IRA or tax-advantaged employer plan personal account contribution choice would be best.
If analyzed properly, the majority of people would find that making investments into a regular IRA or tax-advantaged employer plan retirement accounts is the preferred decision, when those deposits would be currently tax deductible.
The trade-offs are complex. Simple retirement planning spreadsheets cannot model the many important personal financial factors. The preference is not simply about present versus future tax rates. Instead, the choice requires a fully personalized financial planning projection and analysis of an investor’s lifecycle savings, taxes, and assets.
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Whether a family will consume less and save enough to invest carefully across their lives is most important in the Roth retirement plan versus the “deductible against this years income taxes” traditional retirement account contribution choice.
If a family cannot earn a sufficiently high income, does not control consumption to save a lot, does not dramatically reduce investment expenses, and/or cannot build up a large enough retirement nest egg, then that investor won’t be in the upper income tax rates in retirement — whether or not state and federal tax have changed by retirement. If a family does not have sufficiently large income and assets in old age, then the present tax savings an investor will get from choosing an ordinary retirement account contribution will tend to be much more economically advantageous over a life cycle.
Note: This article ONLY talks about financial situations where the person can choose between a “deductible against current income taxes” regular IRA or 401k contribution versus a currently “not deductible against current income taxes” Roth IRA or 401k contribution. If you cannot get the deduction this year but can make a Roth deposit, then the Roth contribution is best.
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