Whether to make investments into an ordinary IRA and tax-advantaged employer plan accounts versus contributing to “Roth” IRA and tax-advantaged employer plan personal accounts is sometimes a confusing decision.
The decision on the trade offs is one of the very intricate decisions of a lifecycle financial freedom plan. A broad array of financial factors can decide whether a ordinary tax-advantaged employer plan or IRA personal account contribution versus a “Roth” tax-advantaged employer plan or IRA account contribution choice would be best.
For most people’s lifetime circumstances making further investments into an ordinary tax-advantaged employer plan or IRA retirement accounts is the preferred decision, when those contributions would be deductible against this year’s income taxes.
The trade-offs are complex. Simple retirement planning spreadsheets are not sufficient to analyze all the critical tradeoffs. The preference is not only about whether tax rates might be higher or lower. Instead, the preference requires a fully personalized financial planning projection and valuation of a person’s life cycle savings, taxes, and assets.
(Look here for a comprehensive Roth retirement planning calculator that makes automatic this regular tax-advantaged employer plan or IRA retirement account versus investing in “Roth” IRA or tax-advantaged employer plan retirement account financial projection.)
Whether or not someone will save enough and invest carefully across their lives dominates the Roth retirement plan versus the “deductible against current income taxes” ordinary retirement plan contribution decision.
If an investor cannot make enough money, does not save aggressively, does not dramatically reduce investment expenses, and/or cannot accumulate a sufficiently substantial investment asset portfolio, then that investor won’t be in high tax brackets in retirement — whether or not federal and state income tax brackets have moved up or down in the interim. If an investor will not have substantial enough income and assets in retirement, then the current tax reduction an investor can get from choosing an ordinary retirement plan additional investment will tend to be much more economically advantageous over a lifetime.
Note: This discussion ONLY focuses on personal financial circumstances where an investor can choose between a “deductible against current income taxes” traditional IRA or 401k additional investment versus a currently “not tax deductible” Roth IRA or 401k contribution. When you can’t take the current tax deduction but can make a Roth deposit, then the Roth deposit is better.
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