Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

01/27/2009
Should I keep a Roth IRA account open if I am not currently adding to it?
I have a Roth IRA with H&R block and a 401k through my job. I was told that they served the same purpose and that I should close the Roth if I wasn't actively putting money into it.
Rosemary Ervin, CPA:
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Is the 401(k) a Roth 401(k)? Roth [IRA] and 401(k) are not the same. If you are no longer contributing to the Roth [IRA], then park it in a bank CD with income reinvest and leave it there until you are at least 59 1/2. If it is a Roth 401(k), then your company may allow you to roll the Roth [IRA] into the Roth 401(k) account. The company 401(k) must have a Roth provision and it must allow rollovers. Not all companies allow the transfer in.
Joan Koonce, Ph.D:
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They are both accounts that allow you to save for retirement; however, they are not the same. When you contribute to a Roth IRA, you are contributing from money that has already been taxed (after-tax dollars). If you hold the Roth IRA for at least 5 years, when you take the money out in retirement, the contributions and interest earned are tax-free (no taxes are paid). When you contribute to a 401(k), you are contributing money that has not been taxed (pre-tax dollars). Both the contributions and interest earned are tax-deferred until you take the money out in retirement; you pay taxes on the money when it is taken out. The maximum contribution limit for Roth IRAs is less than the maximum contribution limit for a 401(k).
Gail V. Marquet:
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Please don't close the Roth, but do move it to a better fund manager. Check with your local credit union. They have services for members which are fee free to assist you with sound investment advice. You invest money in Roth IRAs post tax (that is you have already paid tax on that money). So when you withdraw the funds later in life, you don't pay tax on them. You invest money in a 401k pretax (meaning you have not paid tax on that money) so when you withdraw the funds later, you will have to pay tax on them. But at that point, your earnings will be greatly reduced, so you tax liability will be greatly reduced.
Michael A. Masiello:
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First let me say, this is a very biased response, but one you should be aware of. H&R is a tax prep company. They sell investments, as well. I'm not sure if they have their own mutual funds or investments? They may be okay for taxes, but what kind of training do their investment reps have? My bet, not much.

Many accounting firms, tax prep companies got into financial advice. Doesn't mean they are good at it or even full time or full service. Much of what I have seen is mass produced, cookie cutter stuff. I would suggest you ask friends and multiple people for a professional independent financial adviser, one with more than a few hours of training.

Do not close the Roth. Whoever gave you that advice should be fired. You could incur fees, taxes, and possibly penalties for that bit of wisdom,--an example of an advisor you should not follow. Good Luck, Mike
Wendy Weiss, Ph.D.:
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Don't take that money out of a ROTH IRA! Your ROTH IRA is important. Yes, it serves the same purpose as a 401K. And that is its STRENGTH. Both a 401K and an IRA allow you to save and invest more money for your long retirement period--the time when you will not have a paycheck but will need the money you have put away. So keep contributing to both!!!

There are a few advantages of a ROTH IRA over a 401K. The money you put into a ROTH grows without being taxed (like a 401k). BUT WHEN YOU TAKE OUT a qualified withdrawal, IT IS NOT TAXED! So even if tax rates go up (which they are likely to do) that distribution money is all yours. You won't have to share it with Uncle Sam. That is, if the withdrawal is qualified. A qualified withdrawal usually occurs after you are 59 1/2 years old. Or if you are a qualified first time home buyer. (There are other benefits that may not interest you if you are young, such as a beneficiary can be paid upon your death. But you can have a pay out if you are disabled)

A 401K has a different benefit. Your employer usually offers you a match that is up to 3% of your annual income. Some people refer to this as "free money." So there are some nice advantages to that type of retirement savings as well. So continue to put your money into a 401K even though your gains will be taxed when you take your money out of a 401K after you are 591/2 to fund your retirement.

Now, about investing your Roth IRA, you probably have it in a ROTH IRA savings account with a bank. You can shift that money into a CD. Right now all interest rates are low. But if you select a long-term CD, you are likely to get a better rate. If you think the institution holding your money does not provide sufficient investment choices, you can ROLL OVER YOUR ROTH IRA to another institution. That means you are retaining your money in the IRA, but the rollover marks it as an IRA for tax purposes and reporting. So you don't have to take the money out. It can continue to grow in your Roth. And you can continue to contribute to that ROTH.

Given the very challenging economic environment of this period, I would strongly urge you to invest your ROTH IRA money and this year's contribution in relatively SAFE investments. If you retain your money in a bank IRA savings account, MAKE SURE that your money is in an FDIC insured account in an institution that is FDIC insured. I would be careful with interest rates that are relatively high. In every investment situation, a higher rate indicates that you are taking on higher risk. Right now, institutions that are having trouble--like General Motors and its financial arm, GMAC--are trying to attract money, so they will offer a much higher rate than others. But there is more risk with that institution (and many others you read about in the newspapers).

Normally I recommend that women invest their money in the stock market. Given the fact that these are not normal economic times, I would recommend that you invest more cautiously than usual. So put your ROTH money into a relatively cautious investment--like a long term CD at a reputable FDIC institution. And take a look at your 401K. Send new contributions to the more conservative investments available in your 401K, like Treasury bonds or government securities. As the markets become more normal over the next year or so, you can change that strategy and shift the money that is piling up in your 401K to other investments within that 401K.

More justification for this cautious strategy of putting your new contributions in the safest types of investments in your 401K--most investors put all or most of their money into the stock market and ignore the bond market. A good asset allocation has a portion of your holdings in safer investments. Since it is likely that you have ignored the usually safer bond investments till now, start building that area of your holdings.

I hope this helps you continue to save for your retirement.
Fara Goodwin:
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The Roth IRA through H&R Block and the 401(k) Plan through your employer ARE NOT the same, and while they eventually may serve the same purpose, their creation and function differ dramatically.

A pension plan through your employer is a plan that allows you to reduce your taxable income by deferring (deducting) monies from your paycheck and direct those monies towards a retirement plan account. The 401(k) is funded by before-tax income, therefore your annual taxable income is reduced, which may lower you annual tax-related obligation during your
working years. Upon eligibility to withdraw funds from the account, say at retirement, the withdrawals become income and subject to taxation at that point.

The Roth IRA is funded with taxed income, that is, funds that have already been taxed before you make your deposit. Therefore, upon withdrawing the funds, there is no tax obligation, since the money deposited was already taxed.

Having both accounts is the ideal since you can maximize your employer deductions for your 401(k) Plan, plus save additionally for your retirement through a Roth IRA. IRS provides maximums for each type of plan that can change from year to year. See the IRS website for 2009
maximum limits allowable for both plans.

Even if you do not actively contribute to one or both during a specific year, you can always begin doing so, up to the IRS maximum allowable limit for each type of account. In this case, more is better!
Bettye J. Banks:
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Your 401(k) and your Roth are not the same, except that they are both retirement funds. Your Roth is based on after tax contributions, so you generally do not have to pay taxes on distributions. Your 401(k) is based on before tax contributions (which reduce your taxable income now), but when you begin to receive distributions on it, you will have to pay taxes on that money. Savings are savings, whatever form they take. It is your call as to how and when you wish to save AND pay taxes on earnings. I strongly suggest that you speak to your investment advisor for more specific information.

Gary Silverman, CFP:
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Just because you are not putting new money into an IRA (Roth or Traditional) should have little bearing on whether to keep that account. After all, if you were to close the Roth IRA, where would you put the money? If you are under 59-1/2 any gains (these days, less of an issue) would be taxed and penalized. And, while they likely serve the same goal (growth for now, to produce income in retirement), they can certainly do that together.

Generally (which means you need to do further research to make sure this applies to you), I recommend the following to my clients in choosing where to put their retirement money:
1) Get the most free money you can. Put enough in your 401k to get the maximum match your employer will do.
2) Get the most tax-free growth you can. The next money should go into a Roth IRA, if you qualify for one.
3) Get the most tax-deduction you can. Once the Roth is full [i.e. you have contributed the maximum allowed], go back to the 401k.
Kimberly Dryden:
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Both are ways to save for retirement, and many advisers recommend both. The major difference is tax treatment. 401K investments are made with pre-tax $s, and earnings in the account accumulate tax deferred. When you withdraw funds after retirement you pay income tax on the full amount of the amount you withdraw. Tax penalties exist for withdrawals that are restricted by age or circumstances. Contributions to Roth IRAs are made with after tax $s (in other words no tax deductions for this type of IRA investment) Under current tax laws you can withdraw the amount you contributed without paying tax or penalty, but you only can withdraw the earnings after you retire with no tax or penalty (see tax professional for full details)
Rebecca Schreiber CFP:
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Definitely keep both accounts open. The 401(k) and Roth IRA serve two different purposes and offer you different opportunities. The 401(k) is pre-tax money and you can only invest in the options offered by the 401(k) plan. The Roth IRA is after-tax money and you can use it to invest in a broader range of investments. Also, if your Roth IRA has been open for five years you can use up to $10,000 of earnings (in addition to your contributions) toward a down payment on a house. Take that tax benefit and add it to the tax breaks offered to new homebuyers today and you stand to save several thousand dollars. Some people get discouraged with Roth IRAs because there are too many investment options. If the funds in your Roth IRA are for long-term savings like your 401(k), copy the 401(k) portfolio allocations in your Roth IRA. Good luck!