Judging your Roth vs. traditional IRA
Whether or not to make further investments into an ordinary tax-advantaged employer plan and IRA accounts versus contributing to “Roth” IRA and tax-advantaged employer plan retirement accounts is sometimes a confusing choice.
The decision on the alternatives is one of the most complex decisions of lifetime personal financial planning. Many things can decide whether a regular IRA or tax-advantaged employer plan personal account contribution versus a Roth tax-advantaged employer plan or IRA retirement account contribution decision would be best.
For most people’s lifetime circumstances making further investments into an ordinary IRA or tax-advantaged employer plan retirement accounts is the best choice, when those deposits would be currently tax deductible.
Over a lifetime the analysis is quite complicated. Simple retirement planning spreadsheets cannot model all the important factors. The choice is not only about tax rate changes. Instead, the preference needs a comprehensive financial projection and analysis of an investor’s lifecycle expenses, debts, net assets, and taxes.
(Look here for a sophisticated Roth 401k calculator that makes automatic this regular IRA or tax-advantaged employer plan retirement account versus contributing to Roth tax-advantaged employer plan or IRA retirement account calculation.)
Whether a family will consume less and save enough to invest carefully across their lives dominates the Roth retirement account versus the “currently tax deductible” regular retirement account contribution choice.
If a person does not make enough money, cannot save aggressively, does not dramatically reduce investment expenses, and/or cannot build up a sufficiently substantial investment asset portfolio, then that person won’t be in the upper tax brackets in retirement — whether or not state and federal tax have changed by retirement. If a family will not have sufficiently large income and assets in retirement, then the present tax advantage an investor can get from deciding on an ordinary retirement plan contribution would work out to be much more financially favorable over a life cycle.
Note: This article ONLY talks about financial situations where an investor can choose between a “deductible against this years income taxes” ordinary IRA or 401k additional investment versus a currently “not deductible against current income taxes” Roth IRA or 401k additional investment. When you can’t take a current tax deduction but have available a Roth deposit, then the Roth deposit is best.
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