Figuring out your Roth 401k retirement contribution
Whether or not to make further investments into a traditional IRA and tax-advantaged employer plan accounts versus investing in “Roth†tax-advantaged employer plan and IRA personal accounts is sometimes a confusing choice.
The decision on the trade offs happens to be one of the very intricate decisions of a lifecycle financial freedom plan. A lot of things can affect whether a traditional IRA or tax-advantaged employer plan retirement account contribution versus a “Roth†IRA or tax-advantaged employer plan account contribution decision would be better.
In most circumstances making investments into a traditional IRA or tax-advantaged employer plan retirement accounts is the better decision, when those contributions would be deductible against current income taxes.
The trade-offs are complex. Rules-of-thumb are not sufficient to model all the critical tradeoffs. The choice is not simply about whether tax rates might be higher or lower. Instead, the preference requires a comprehensive personal finance projection and analysis of the family’s life cycle savings, taxes, and assets.
(Here is where you can find a sophisticated Roth IRA investment calculator that makes automatic this ordinary tax-advantaged employer plan or IRA personal account versus investing in “Roth†tax-advantaged employer plan or IRA personal account calculation.)
Whether or not a person will consume less and save enough and invest efficiently across a lifetime is most important in the Roth retirement account versus the “deductible against this years income taxes” regular retirement plan additional investment choice.
If an investor does not make enough money, does not control consumption to save a lot, does not dramatically reduce investment expenses, and/or cannot build up a sufficiently substantial investment asset portfolio, then that investor will not have to worry about being in high tax brackets when retired — whether or not state and federal tax have moved up or down in the interim. If a family will not have substantial enough income and assets when retired, then the current tax reduction a person can get from picking a traditional retirement plan additional investment would work out to be more financially favorable over a lifetime.
Note: This article ONLY talks about personal financial circumstances where the person can choose between a “deductible against this years income taxes” traditional IRA or 401k additional investment versus a currently “not tax deductible” Roth IRA or 401k contribution. If you cannot get the deduction this year but have available a Roth deposit, then the Roth deposit is best.
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