Roth IRA – Differences from Traditional IRA’s and 401k’s

by Wes Bridel on August 26, 2009

in Stewardship

How does the Roth IRA stack up to more traditional 401k's & IRA's?

How does the Roth IRA stack up to more traditional 401k's & IRA's?

We’ve spent the last 10 posts covering the many facets of Qualified Plans (which include traditional IRA’s, 401k’s, 403b’s, SEP IRA’s, etc.)  Today we’ll look at the differences and similarities between these more traditional types and the newer Roth IRA’s.

Roth IRA’s  allow you to put money into a tax deferral vehicle just like the other plans.  The difference is that when you put money into the plan, you do not get a tax deduction this year.  You put the money into the plan and it grows tax deferred and can then be pulled out tax free no matter how much it has grown.  After the last few posts, that probably sounds very refreshing, and we think it’s probably often a better decision for a lot of the people we meet with.

An even newer allowance that the government has made is for Roth 401k’s.  These plans have the taxation of a Roth instead of a typical 401k, but are facilitated through employers just as the older version of Roth IRA is.  We haven’t seen many of these yet and it’s probably a nightmare for HR departments to switch over, or offer both, but these are a legal option for employers to offer now.

Roth IRA’s don’t have the severe tax distribution consequences the others have, so you would probably be much freer to pull money out of these accounts in “retirement.”  However, all the other issues still apply to these accounts.

Actually, things are still slightly better.  Money that goes into these accounts can be pulled out without penalty.  But any growth of that money would face the same 10% penalty as the traditional IRA (or 401k).  Also, the money cannot be put back into the plan (unless it’s a new year’s contribution).  So you don’t have the flexibility of putting it into the tax deferred plan and then taking it out for whatever purpose you need, or the Lord leads you to, and then putting it back to again take advantage of the tax benefits.

So you have the same lack of control and accessibility issues that we’ve spoken about.  And most plans are subject to the same lack of investment choice we’ve spoken about for all IRA’s, although there are administrators who can give you many more options than most do.  However, because velocity is such an important aspect of any real wealth building enterprise, the Roth IRA’s lack of velocity should be carefully contemplated before deciding to lock money away into it.

We’ve spoken at great length about the potential problems with government sponsored retirement plans in part because everyone primarily hears how wonderful they are.  Financial Institutions spend billions of dollars every year convincing you and everyone else that you should put as much money as you can into these plans.

We did mention in an earlier part of this series the advantages to these plans and there are some.

Never let anyone tell you that some product or plan is all good or all bad all the time.  What you should do is take into account all of the factors in your own unique situation and decide how the Lord would have you manage all that He’s given you.  And we are here to help you make the best most informed decision.

Tomorrow, we’ll begin to compare the advantages and disadvantages of life insurance to these plans.

This is _Part 20_, the last post in the series titled The Trunk. To use this as a growth tool, please read Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6, Pt 7, Pt 8, Pt 9, Pt 10, Pt 11, Pt 12, Pt 13, Pt 14, Pt 15, Pt 16, Pt 17, Pt 18 and Pt 19.

Photo credit: gela cooley

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