Whether to make further investments into an ordinary IRA and tax-advantaged employer plan personal accounts versus investing in Roth tax-advantaged employer plan and IRA retirement accounts is not always a straightforward choice.
The decision on the alternatives happens to be one of the very intricate choices of lifetime personal financial planning. A broad array of financial factors can affect whether a ordinary tax-advantaged employer plan or IRA personal account contribution versus a Roth tax-advantaged employer plan or IRA account contribution choice would be optimal.
If analyzed properly, the majority of people would find that investing into a traditional IRA or tax-advantaged employer plan retirement accounts is the best choice, when those deposits would be deductible against current income taxes.
The trade-offs are complex. Rules-of-thumb are not sufficient to model all the important factors. The choice is not simply about whether tax rates might be higher or lower. Instead, the decision needs a comprehensive personal finance projection and valuation of a person’s lifetime income, taxes, and assets.
(Here is where you can find a comprehensive Roth retirement planner that fully automates this ordinary IRA or tax-advantaged employer plan account versus investing in “Roth” IRA or tax-advantaged employer plan retirement account financial projection.)
Whether or not a family will save enough to invest efficiently across their lives is most important in the Roth retirement plan versus the “deductible against this years income taxes” traditional retirement plan contribution choice.
If an investor cannot make enough money, does not control consumption to save a lot, cannot strictly control investment costs, and/or cannot accumulate a sufficiently substantial investment asset portfolio, then that person will not have to worry about being in the upper income tax rates in retirement — whether or not state and federal income tax brackets have moved up or down in the interim. If a person does not have sufficiently large income and assets in retirement, then the current tax reduction a person can get from choosing an ordinary retirement account additional investment will tend to be much more economically advantageous over a lifetime.
Note: This article ONLY talks about financial situations where the person has the choice of making a “deductible against this years income taxes” regular IRA or 401k contribution versus a currently “non-deductible against this years income taxes” Roth IRA or 401k contribution. If you cannot get the deduction this year but have available a Roth contribution, then the Roth deposit is more desirable.
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Taxes, Efficient Markets, & Mutual Funds. NB: current tax law excludes deductibility of investment interest expense against qualified dividends. Also see/hear Borrowing.
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