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Posts Tagged ‘Roth IRA’

Whether to make further investments into a traditional IRA and tax-advantaged employer plan retirement accounts versus contributing to “Roth” tax-advantaged employer plan and IRA personal accounts is sometimes a confusing decision.

The decision on the trade offs is one of the very intricate choices of a lifecycle financial freedom plan. A broad array of financial factors can influence whether a traditional tax-advantaged employer plan or IRA personal account contribution versus a “Roth” IRA or tax-advantaged employer plan retirement account contribution choice would be best.

If analyzed properly, the majority of people would find that making investments into a traditional IRA or tax-advantaged employer plan retirement accounts is the preferred decision, when those contributions would be currently tax deductible.

The trade-offs are complex. Back-of-the-envelope calculations cannot analyze all the critical tradeoffs. The preference is not only about whether tax rates might be higher or lower. Instead, the decision needs a fully personalized financial projection and valuation of an investor’s lifecycle expenses, debts, net assets, and taxes.

(Here is where you can find a sophisticated Roth IRA planning calculator that fully automates this regular tax-advantaged employer plan or IRA personal account versus investing in “Roth” IRA or tax-advantaged employer plan personal account financial projection.)

Whether a family will save enough to invest carefully across their lives dominates the Roth retirement account versus the “deductible against current income taxes” traditional retirement plan additional investment decision.

When an investor does not make enough money, cannot save aggressively, does not strictly control investment costs, and/or cannot build up a sufficiently substantial investment asset portfolio, then that investor won’t be in the upper income tax rates when retired — 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 old age, then the present tax advantage an investor will get from deciding on an ordinary retirement account additional investment will tend to be more economically advantageous over a life cycle.

Note: This article ONLY talks about personal financial circumstances where somebody has the choice of making a “deductible against this years income taxes” ordinary IRA or 401k contribution versus a currently “not deductible against current income taxes” Roth IRA or 401k additional investment. If you cannot get a current tax deduction but can make a Roth deposit, then the Roth contribution is more desirable.

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