Considering your Roth investment
By fulltimeincome | March 8th, 2010
Whether or not to invest into a traditional IRA and tax-advantaged employer plan accounts versus contributing to Roth tax-advantaged employer plan and IRA retirement accounts is not always a straightforward choice.
The decision on the alternatives happens to be one of the very intricate choices of lifetime personal financial planning. A lot of financial factors can influence 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 better.
In most circumstances investing into a traditional IRA or tax-advantaged employer plan retirement accounts is the preferred decision, when those deposits would be deductible against current income taxes.
The trade-offs are complex. Simple retirement planning spreadsheets cannot analyze all the critical tradeoffs. The preference is not simply about present versus future tax rates. Instead, the choice needs a fully personalized personal finance projection and analysis of a person’s life cycle income, taxes, and assets.
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Whether a family will save enough to invest carefully over their lives dominates the Roth retirement plan versus the “deductible against this years income taxes” ordinary retirement account additional investment decision.
When a family cannot make enough money, cannot control consumption to save a lot, cannot dramatically reduce investment expenses, and/or cannot grow a large enough retirement nest egg, then that investor will not have to worry about being in the upper tax brackets in retirement — regardless of whether state and federal income tax brackets have changed in the interim. If an investor does not have sufficiently large income and assets in old age, then the current tax advantage an investor can get from deciding on a regular retirement plan contribution will tend to be much more economically advantageous over a life cycle.
Note: This discussion ONLY focuses on financial situations where the person can choose between a “deductible against this years income taxes” ordinary IRA or 401k contribution versus a currently “not tax deductible” Roth IRA or 401k contribution. If you cannot get the current tax deduction but can make a Roth deposit, then the Roth contribution is more desirable.
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