Mutual Fund Investing

Whether or not to invest into a regular tax-advantaged employer plan and IRA personal accounts versus contributing to Roth IRA and tax-advantaged employer plan accounts is not always a straightforward decision.

The decision on the alternatives is one of the most complex decisions of lifetime personal financial planning. A lot of financial factors can decide whether a traditional IRA or tax-advantaged employer plan account contribution versus a “Roth” IRA or tax-advantaged employer plan personal account contribution choice would be optimal.

In most circumstances making investments into a traditional IRA or tax-advantaged employer plan accounts is the preferred decision, 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 able to analyze all the critical tradeoffs. The preference is not simply about whether tax rates might be higher or lower. Instead, the decision needs a comprehensive financial planning projection and analysis of an investor’s life cycle expenses, debts, net assets, and taxes.

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Whether someone will consume less and save enough and invest efficiently across a lifetime is most important in the Roth retirement plan versus the “deductible against current income taxes” regular retirement account additional investment choice.

When a person does not make enough money, does not control consumption to save a lot, cannot strictly control investment costs, and/or cannot build up a large enough portfolio of assets, then that person will not have to worry about being in the upper income tax rates when retired — regardless of whether state and federal income tax brackets have moved up or down by retirement. If a person will not have sufficiently large income and assets in retirement, then the present tax advantage a person can get from deciding on a traditional retirement account contribution would work out to be more economically advantageous over a lifetime.

Note: This discussion ONLY focuses on personal financial circumstances where an investor can choose between a “deductible against current income taxes” regular IRA or 401k contribution versus a currently “not tax deductible” Roth IRA or 401k additional investment. When you can’t take the deduction this year but can make a Roth contribution, then the Roth deposit is better.

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