How I Will Be Rich

About a week ago I received a response to my post, “No Reason Not To Have a Roth IRA“, with some reasons to actually not have a Roth IRA.

Richard Wrote:

1) The amount you save each year for retirement does not exceed the amount necessary for full 401(k) employer match. I have decided calculated that I can save X percent each year for retirement. Since my employer matches 25% for that X percent, I would be losing out on an instant gain of 25% (not to mention that it otherwise would be after tax dollars) by putting the money into the Roth.

Whenever I have discussed this with friends, they say that if I’m only contributing up to their match, then I’m not contributing enough. To this I respond that my employeer (though this is rare) will match 25% on up to the government limit (15,500). So my X is actually a pretty hefty sum.

2) The other money I am saving (like for a downpayment) is for short term goals. For this reason I invest the money in an ING account. Although I could invest this money in an ROTH and pull it out when I need the house, what if the stock market drops right before I decide to buy this house. The one thing people neglect to mention about ROTHs is that although you can pull out your contributions, you can’t do that if the value of the account is below what you’ve put in. With my ING account I’m guarenteed (FDIC) to have the money I’ve put in.

I believe Richard makes some very valid points. In response to #1, I agree that if you have an employer matched 401K, you should definitely take advantage of that. A lot of employers do not offer this sort of benefit. I do believe, however, that a Roth IRA can be beneficial on top of the 401K. The downside of a 401K plan is that the tax is deferred and must be paid once you withdraw. With a Roth, you are paying income taxes before investing and you are not required to pay taxes on your capital gains. A lot of companies limit what you can invest in with your 401K funds as well. With a Roth IRA, you are limited only to what your broker provides. You can allocate your assets differently between the two.

As far as a response to your second comment, I do agree that a Roth IRA is not the best plan for saving for house. The point that I was trying to make is that those funds aren’t untouchable if you absolutely need to use them for a down payment. When purchasing a house, you are much better off coming up with a down payment without touching your retirement accounts. But your IRA is there if necessary.

-M

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