Forecast a Roth IRA investment
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Whether to make further investments into a traditional tax-advantaged employer plan and IRA personal accounts versus investing in “Roth” IRA and tax-advantaged employer plan personal accounts is not always a straightforward decision.
The decision on the trade offs happens to be one of the most complex choices of a lifecycle financial freedom plan. A broad array of financial factors can decide whether a traditional tax-advantaged employer plan or IRA personal account contribution versus a Roth tax-advantaged employer plan or IRA personal account contribution decision would be best.
In most circumstances making investments into a traditional tax-advantaged employer plan or IRA retirement accounts is the preferred decision, when those contributions would be currently tax deductible.
The trade-offs are complex. Back-of-the-envelope calculations cannot analyze the many important personal financial factors. The choice is not simply about present versus future tax rates. Instead, the decision requires a comprehensive financial planning projection and analysis of an investor’s lifetime income, taxes, and assets.
(Here is where you can find a sophisticated Roth 401k calculator that fully automates this regular tax-advantaged employer plan or IRA retirement account versus contributing to Roth tax-advantaged employer plan or IRA personal account calculation.)
Whether a person will save enough to invest carefully over a lifetime dominates the Roth retirement plan versus the “currently tax deductible” ordinary retirement account additional investment choice.
If a person does not earn a sufficiently high income, cannot save aggressively, cannot strictly control investment costs, and/or does not grow a large enough investment asset portfolio, then that investor will not have to worry about being in high income tax rates when retired — regardless of whether federal and state tax have changed in the interim. If an investor does not have substantial enough assets and income in retirement, then the current tax reduction a person will get from picking a traditional retirement account contribution will tend to be more economically advantageous over a lifetime.
Note: This discussion ONLY focuses on financial situations where somebody has the choice of making a “deductible against this years income taxes” ordinary IRA or 401k additional investment versus a currently “non-deductible against this years income taxes” Roth IRA or 401k contribution. If you cannot get a current tax deduction but can make a Roth contribution, then the Roth contribution is better.
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