Assessing a Roth IRA account
Whether to invest 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 alternatives is one of the very intricate choices of lifetime personal financial planning. A lot of personal finance issues can decide whether a ordinary tax-advantaged employer plan or IRA retirement account contribution versus a Roth tax-advantaged employer plan or IRA personal account contribution choice would be optimal.
For most people’s lifetime circumstances making further investments into a traditional IRA or tax-advantaged employer plan retirement accounts is the best choice, when those deposits would be deductible against this year’s income taxes.
Over a lifetime the analysis is quite complicated. Rules-of-thumb are not able to analyze all the important factors. The decision is not just about present versus future tax rates. Instead, the decision requires a fully personalized financial planning projection and valuation of the family’s lifetime income, taxes, and assets.
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Whether someone will consume less and save enough and invest carefully over their lives is most important in the Roth retirement account versus the “deductible against this years income taxes” regular retirement account additional investment choice.
When an investor cannot make enough money, does not save aggressively, cannot dramatically reduce investment expenses, and/or does not build up a large enough retirement nest egg, then that person won’t be in the upper tax brackets when retired — whether or not state and federal tax have moved up or down in the interim. If an investor will not have sufficiently large assets and income in retirement, then the current tax reduction an investor will get from choosing an ordinary retirement account contribution will tend to be more financially favorable over a life cycle.
Note: This article ONLY talks about financial situations where the person 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 additional investment. When you can’t take the deduction this year but can make a Roth deposit, then the Roth deposit is more desirable.
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