Whether or not to invest into an ordinary IRA and tax-advantaged employer plan accounts versus contributing to Roth tax-advantaged employer plan and IRA personal accounts is sometimes a confusing decision.
The choice on the alternatives is one of the very intricate choices of a lifecycle financial freedom plan. A broad array of things can decide whether a traditional IRA or tax-advantaged employer plan personal account contribution versus a “Roth” tax-advantaged employer plan or IRA account contribution choice would be better.
If analyzed properly, the majority of people would find that making further investments into a regular IRA or tax-advantaged employer plan personal accounts is the preferred choice, when those deposits would be currently tax deductible.
Over a lifetime the analysis is quite complicated. Rules-of-thumb are not sufficient to analyze all the critical tradeoffs. The choice 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 life cycle savings, taxes, and assets.
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Whether or not someone will consume less and save enough to invest efficiently across a lifetime dominates the Roth retirement plan versus the “currently tax deductible” traditional retirement account contribution decision.
If a family cannot earn a sufficiently high income, cannot save aggressively, cannot dramatically reduce investment expenses, and/or cannot build up a sufficiently substantial investment asset portfolio, then that investor will not have to worry about being in high tax brackets in retirement — whether or not federal and state income tax brackets have changed by retirement. If a family does not have substantial enough assets and income in old age, then the current tax advantage a person will 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 an investor has the choice of making a “currently tax deductible” regular IRA or 401k contribution versus a currently “not deductible against current income taxes” Roth IRA or 401k contribution. When you can’t take a deduction this year but have available a Roth contribution, then the Roth contribution is more desirable.
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