Projecting a Roth retirement account
Whether or not to make investments into a regular IRA and tax-advantaged employer plan accounts versus investing in Roth tax-advantaged employer plan and IRA personal accounts is not always a straightforward choice.
The decision on the trade offs is one of the very intricate choices of lifetime personal financial planning. A lot of things can affect 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 better.
In most circumstances making further investments into a traditional IRA or tax-advantaged employer plan retirement accounts is the better decision, when those deposits would be currently tax deductible.
The trade-offs are complex. Simple retirement planning spreadsheets are not able to model all the critical tradeoffs. The preference is not only about present versus future tax rates. Instead, the choice needs a fully personalized financial projection and analysis of the family’s lifecycle expenses, debts, net assets, and taxes.
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Whether a person will consume less and save enough and invest carefully across a lifetime is most important in the Roth retirement account versus the “deductible against current income taxes” regular retirement plan contribution decision.
If a person does not make enough money, does not control consumption to save a lot, does not strictly control investment costs, and/or does not grow a large enough investment asset portfolio, then that investor won’t be in high tax brackets in retirement — whether or not state and federal tax have changed in the interim. If an investor will not have substantial enough income and assets in old age, then the current tax reduction a person will get from choosing a regular retirement account contribution would work out to be much more financially favorable over a lifetime.
Note: This discussion ONLY focuses on financial situations where somebody can choose between a “currently tax deductible” traditional IRA or 401k contribution versus a currently “non-deductible against this years income taxes” Roth IRA or 401k contribution. If you cannot get a current tax deduction but have available a Roth deposit, then the Roth contribution is better.
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