Forecast a Roth IRA plan
March 11th, 2010Whether or not to make investments into a regular IRA and tax-advantaged employer plan personal accounts versus contributing to “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 a lifecycle financial freedom plan. A lot of personal finance issues can affect whether a ordinary tax-advantaged employer plan or IRA account contribution versus a Roth IRA or tax-advantaged employer plan personal account contribution decision would be better.
If analyzed properly, the majority of people would find that investing into an ordinary IRA or tax-advantaged employer plan retirement accounts is the better decision, when those deposits would be currently tax deductible.
Over a lifetime the analysis is quite complicated. Simple retirement planning spreadsheets are not sufficient to model all the critical tradeoffs. The preference is not simply about present versus future tax rates. Instead, the choice needs a comprehensive financial planning projection and analysis of the family’s life cycle income, taxes, and assets.
(Look here for a comprehensive Roth financial planning calculator that makes automatic this traditional tax-advantaged employer plan or IRA retirement account versus investing in “Roth” tax-advantaged employer plan or IRA account financial projection.)
Whether a person will save enough to invest carefully over a lifetime dominates the Roth retirement account versus the “currently tax deductible” regular retirement plan contribution choice.
If an investor does not earn a sufficiently high income, cannot control consumption to save a lot, does not dramatically reduce investment expenses, and/or does not grow a sufficiently substantial investment asset portfolio, then that investor won’t be in the upper tax brackets when retired — regardless of whether federal and state tax have changed in the interim. If a family will not have substantial enough assets and income in old age, then the current tax reduction a person will get from deciding on a traditional retirement plan contribution will tend to be much more economically advantageous over a life cycle.
Note: This article ONLY talks about financial situations where an investor can choose between 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 additional investment. When you can’t take the deduction this year but have available a Roth contribution, then the Roth deposit is best.
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