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Analyzing a Roth 401k retirement investment
By plrprousers | March 21, 2010
Whether to invest into an ordinary IRA and tax-advantaged employer plan accounts versus contributing to Roth tax-advantaged employer plan and IRA accounts is sometimes a confusing decision.
The decision on the trade offs happens to be one of the very intricate choices of do-it-yourself financial planning. A lot of things can decide whether a regular IRA or tax-advantaged employer plan account contribution versus a Roth tax-advantaged employer plan or IRA personal account contribution choice would be best.
If analyzed properly, the majority of people would find that investing into a traditional IRA or tax-advantaged employer plan retirement accounts is the preferred decision, when those deposits would be currently tax deductible.
The trade-offs are complex. Rules-of-thumb cannot analyze the many important personal financial factors. The decision is not simply about whether tax rates might be higher or lower. Instead, the decision needs a fully personalized financial projection and analysis of the family’s lifecycle savings, taxes, and assets.
(Here is where you can find a sophisticated Roth IRA versus traditional IRA calculator that makes automatic this regular IRA or tax-advantaged employer plan account versus contributing to Roth IRA or tax-advantaged employer plan account calculation.)
Whether or not someone will consume less and save enough to invest efficiently over their lives dominates the Roth retirement plan versus the “deductible against current income taxes” traditional retirement plan additional investment decision.
If an investor does not earn a sufficiently high income, does not control consumption to save a lot, does not dramatically reduce investment expenses, and/or does not accumulate a sufficiently substantial portfolio of assets, then that person will not have to worry about being in the upper tax brackets in retirement — regardless of whether federal and state tax have moved up or down in the interim. If a person does not have sufficiently large assets and income when retired, then the present tax savings an investor can get from picking an ordinary retirement plan contribution would work out to be more economically advantageous over a lifetime.
Note: This article ONLY talks about financial situations where the person has the choice of making a “currently tax deductible” traditional IRA or 401k contribution versus a currently “not deductible against current income taxes” Roth IRA or 401k contribution. When you can’t take the deduction this year but have available a Roth deposit, then the Roth contribution is more desirable.
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