Whether to make further investments into a regular tax-advantaged employer plan and IRA personal accounts versus investing in “Roth” tax-advantaged employer plan and IRA retirement accounts is sometimes a confusing choice.
The decision on the trade offs happens to be one of the most complex choices of lifetime personal financial planning. A broad array of financial factors can influence whether a regular tax-advantaged employer plan or IRA account contribution versus a Roth tax-advantaged employer plan or IRA personal account contribution decision would be optimal.
For most people’s lifetime circumstances making further investments into a traditional IRA or tax-advantaged employer plan accounts is the preferred decision, when those contributions would be currently tax deductible.
The trade-offs are complex. Simple retirement planning spreadsheets are not sufficient to model the many important personal financial factors. The choice is not only about present versus future tax rates. Instead, the choice needs a fully personalized personal finance projection and valuation of the family’s lifetime income, taxes, and assets.
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Whether or not a family will consume less and save enough and invest carefully across a lifetime is most important in the Roth retirement plan versus the “currently tax deductible” ordinary retirement account additional investment decision.
When an investor cannot make enough money, does not save aggressively, cannot dramatically reduce investment expenses, and/or does not grow a large enough portfolio of assets, then that investor won’t be in high income tax rates in retirement — whether or not state and federal income tax brackets have moved up or down by retirement. If an investor does not have sufficiently large assets and income in retirement, then the current tax advantage a person will get from deciding on an ordinary retirement account additional investment would work out to be more economically advantageous over a life cycle.
Note: This article ONLY talks about financial situations where an investor has the choice of making a “deductible against this years income taxes” traditional IRA or 401k additional investment versus a currently “not deductible against current income taxes” Roth IRA or 401k additional investment. If you cannot get a deduction this year but can make a Roth contribution, then the Roth contribution is better.
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