Whether or not to make further investments into a traditional IRA and tax-advantaged employer plan accounts versus contributing to Roth tax-advantaged employer plan and IRA retirement accounts is sometimes a confusing decision.
The choice on the trade offs is one of the most complex decisions of do-it-yourself financial planning. A broad array of things can affect whether a regular IRA or tax-advantaged employer plan personal account contribution versus a “Roth” IRA or tax-advantaged employer plan account contribution choice would be best.
For most people’s lifetime circumstances investing into a regular tax-advantaged employer plan or IRA personal accounts is the preferred choice, when those contributions would be deductible against current income taxes.
Over a lifetime the analysis is quite complicated. Simple retirement planning spreadsheets are not sufficient to analyze all the important factors. The choice is not only about tax rate changes. Instead, the decision needs a comprehensive financial projection and analysis of the family’s life cycle savings, taxes, and assets.
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Whether or not a person will save enough and invest efficiently across their lives dominates the Roth retirement account versus the “deductible against current income taxes” traditional retirement account contribution decision.
When a person does not earn a sufficiently high income, does not save aggressively, does not strictly control investment costs, and/or cannot accumulate a sufficiently substantial retirement nest egg, then that person will not have to worry about being in the upper income tax rates when retired — regardless of whether state and federal income tax brackets have moved up or down in the interim. If an investor does not have sufficiently large assets and income in old age, then the current tax advantage an investor will get from deciding on a regular retirement account contribution would work out to be much more economically advantageous over a life cycle.
Note: This discussion ONLY focuses on personal financial circumstances where somebody has the choice of making a “deductible against this years income taxes” regular IRA or 401k additional investment versus a currently “not deductible against current income taxes” Roth IRA or 401k contribution. If you cannot get a deduction this year but can make a Roth deposit, then the Roth deposit is more desirable.
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