Forecast a Roth 401k retirement plan
1st February 2010 by Tax Man No CommentsWhether or not to make further investments into a regular IRA and tax-advantaged employer plan personal accounts versus contributing to Roth IRA and tax-advantaged employer plan retirement accounts is not always a straightforward choice.
The decision on the alternatives happens to be one of the most complex choices of a lifecycle financial freedom plan. A broad array of financial factors can affect whether a ordinary tax-advantaged employer plan or IRA retirement account contribution versus a Roth tax-advantaged employer plan or IRA account contribution decision would be optimal.
For most people’s lifetime circumstances making investments into an ordinary IRA or tax-advantaged employer plan retirement accounts is the better decision, when those contributions would be currently tax deductible.
The trade-offs are complex. Back-of-the-envelope calculations are not sufficient to analyze all the critical tradeoffs. The decision is not just about whether tax rates might be higher or lower. Instead, the preference needs a fully personalized financial planning projection and analysis of an investor’s life cycle expenses, debts, net assets, and taxes.
(Here is where you can find a sophisticated Roth retirement planner that fully automates this regular tax-advantaged employer plan or IRA retirement account versus investing in “Roth” tax-advantaged employer plan or IRA personal account analysis.)
Whether or not a family will save enough and invest efficiently across their lives is most important in the Roth retirement plan versus the “currently tax deductible” regular retirement plan contribution choice.
If a person cannot make enough money, does not control consumption to save a lot, does not strictly control investment costs, and/or cannot accumulate a large enough retirement nest egg, then that investor won’t be in high income tax rates when retired — regardless of whether federal and state tax have moved up or down in the interim. If an investor does not have substantial enough assets and income in retirement, then the current tax savings a person will get from picking an ordinary retirement account additional investment would work out to be much more economically advantageous 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” regular IRA or 401k contribution versus a currently “not deductible against current income taxes” Roth IRA or 401k additional investment. If you cannot get a current tax deduction but can make a Roth deposit, then the Roth contribution is more desirable.
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