Sizing up a Roth vs. traditional IRA
Whether to invest into an ordinary IRA and tax-advantaged employer plan personal accounts versus investing in “Roth” tax-advantaged employer plan and IRA personal accounts is not always a straightforward decision.
The decision on the trade offs is one of the most complex choices of a lifecycle financial freedom plan. A broad array of financial factors can affect whether a ordinary tax-advantaged employer plan or IRA retirement account contribution versus a “Roth” IRA or tax-advantaged employer plan account contribution choice would be better.
In most circumstances investing into an ordinary tax-advantaged employer plan or IRA personal accounts is the better choice, when those deposits would be deductible against current income taxes.
Over a lifetime the analysis is quite complicated. Back-of-the-envelope calculations cannot model the many important personal financial factors. The choice is not only about present versus future tax rates. Instead, the decision needs a comprehensive financial projection and valuation of a person’s lifecycle expenses, debts, net assets, and taxes.
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Whether a person will save enough to invest efficiently over a lifetime dominates the Roth retirement account versus the “deductible against current income taxes” ordinary retirement plan additional investment decision.
When a person does not make enough money, cannot save aggressively, does not strictly control investment costs, and/or cannot build up a sufficiently substantial portfolio of assets, then that person will not have to worry about being in the upper tax brackets when retired — regardless of whether federal and state tax have changed in the interim. If an investor does not have sufficiently large income and assets when retired, then the present tax reduction a person can get from picking a traditional retirement account additional investment will tend to be much more economically advantageous over a life cycle.
Note: This article ONLY talks about financial situations where somebody can choose between a “currently tax deductible” ordinary IRA or 401k additional investment 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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