Forecast a Roth 401(k)

Whether or not to make investments into an ordinary tax-advantaged employer plan and IRA accounts versus investing in “Roth” tax-advantaged employer plan and IRA retirement accounts is sometimes a confusing decision.

The choice on the trade offs happens to be one of the very intricate decisions of do-it-yourself financial planning. Many things can influence whether a regular IRA or tax-advantaged employer plan personal account contribution versus a “Roth” IRA or tax-advantaged employer plan account contribution decision would be best.

In most circumstances making investments into a traditional tax-advantaged employer plan or IRA personal accounts is the preferred decision, when those deposits would be deductible against current income taxes.

Over a lifetime the analysis is quite complicated. Rules-of-thumb are not sufficient to model the many important personal financial factors. The preference is not just about present versus future tax rates. Instead, the choice needs a fully personalized financial projection and analysis of a person’s lifetime savings, taxes, and assets.

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Whether a person will save enough and invest efficiently over their lives is most important in the Roth retirement plan versus the “deductible against this years income taxes” traditional retirement plan additional investment decision.

If an investor cannot earn a sufficiently high income, does not control consumption to save a lot, does not strictly control investment costs, and/or does not build up a large enough investment asset portfolio, then that investor won’t be in the upper income tax rates in retirement — whether or not state and federal income tax brackets have moved up or down by retirement. If a family does not have substantial enough assets and income when retired, then the current tax reduction a person will get from deciding on a traditional retirement plan contribution will tend to be much more financially favorable over a lifetime.

Note: This article ONLY talks about personal financial circumstances where the person has the choice of making a “deductible against current income taxes” ordinary 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 a deduction this year but can make a Roth contribution, then the Roth contribution is better.

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