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Value your Roth retirement account
By plrprousers | March 7, 2010
Whether to invest into a traditional tax-advantaged employer plan and IRA personal accounts versus contributing to Roth tax-advantaged employer plan and IRA retirement accounts is sometimes a confusing decision.
The decision on the alternatives happens to be one of the very intricate decisions of lifetime personal financial planning. Many financial factors can decide whether a regular IRA or tax-advantaged employer plan retirement account contribution versus a “Roth” IRA or tax-advantaged employer plan account contribution decision would be optimal.
If analyzed properly, the majority of people would find that making further investments into a regular IRA or tax-advantaged employer plan accounts is the best choice, when those contributions would be deductible against this year’s income taxes.
Over a lifetime the analysis is quite complicated. Rules-of-thumb are not sufficient to analyze all the important factors. The choice is not just about tax rate changes. Instead, the decision requires a fully personalized financial planning projection and valuation of the family’s lifecycle savings, taxes, and assets.
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Whether a person will consume less and save enough and invest carefully over their lives dominates the Roth retirement account versus the “currently tax deductible” ordinary retirement plan contribution choice.
If a family does not make enough money, does not save aggressively, cannot strictly control investment costs, and/or does not build up a large enough retirement nest egg, then that person will not have to worry about being in high income tax rates in retirement — whether or not state and federal income tax brackets have changed by retirement. If a family will not have sufficiently large income and assets in old age, then the current tax savings a person can get from choosing a traditional retirement plan additional investment would work out to be more financially favorable over a life cycle.
Note: This discussion ONLY focuses on financial situations where the person can choose between 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. When you can’t take the deduction this year but can make a Roth contribution, then the Roth contribution is better.
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