Measuring a Roth account
Whether or not to invest into a traditional IRA and tax-advantaged employer plan accounts versus investing in “Roth” IRA and tax-advantaged employer plan retirement accounts is sometimes a confusing decision.
The decision on the alternatives is one of the very intricate choices of a lifecycle financial freedom plan. A broad array of personal finance issues can decide whether a traditional IRA or tax-advantaged employer plan account contribution versus a “Roth” tax-advantaged employer plan or IRA account contribution decision would be better.
In most circumstances making further investments into a regular IRA or tax-advantaged employer plan retirement accounts is the best decision, when those contributions would be deductible against current income taxes.
The trade-offs are complex. Back-of-the-envelope calculations cannot analyze all the important factors. The preference is not simply about tax rate changes. Instead, the choice needs a fully personalized financial planning projection and analysis of the family’s lifecycle savings, taxes, and assets.
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Whether or not a person will save enough to invest efficiently over a lifetime is most important in the Roth retirement account versus the “deductible against current income taxes” traditional retirement plan contribution decision.
If an investor does not make enough money, cannot save aggressively, cannot strictly control investment costs, and/or does not grow a sufficiently substantial retirement nest egg, then that person won’t be in high income tax rates in retirement — whether or not federal and state income tax brackets have moved up or down in the interim. If a person will not have substantial enough assets and income when retired, then the current tax savings an investor can get from deciding on a regular retirement plan contribution will tend to be much more financially favorable over a lifetime.
Note: This article ONLY talks about financial situations where somebody can choose between a “deductible against this years income taxes” ordinary IRA or 401k additional investment versus a currently “non-deductible against this years income taxes” Roth IRA or 401k additional investment. When you can’t take the current tax deduction but can make a Roth deposit, then the Roth deposit is best.
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