Contributing to a Roth IRA If Your Company Makes An ESOP Contribution To Your Retirement Account

Added October 13, 2009 by Ilyce R. Glink

Print Articles

Summary: Can you still contribute to a Roth IRA if your company makes an ESOP contribution to your retirement account? A reader wants to know if there are any limitations on contributing to a Roth IRA even though she gets stock from an ESOP account and has a 401(k).

Contributing to a Roth IRA If Your Company Makes An ESOP Contribution To Your Retirement Account

Question: Hi Ilyce. I always enjoy your show when you fill in for Clark Howard in Atlanta. I have some questions that I keep getting conflicting answers on. Can you help?

My employer contributes to an Employee Stock Ownership Plan (ESOP) plan for my retirement. The company also offers a 401(k) with no matching that I have been contributing to with each paycheck. I am 51 years old and I am thinking that it would be wiser for me to contribute to a Roth IRA and stop contributing to the 401(k). Can I contribute to a Roth IRA since my employer contributes to an ESOP for me? Can I contribute to a Traditional IRA and have the ESOP?

Also, my understanding is that I can withdraw the contributions tax free and penalty free after 5 years for ANY reason if I wish? Thank you so much. I am getting some conflicting answers to these questions.

Answer:You should be able to contribute to the Roth IRA even if your employer contributes to an ESOP. Roth is after-tax and ESOPs and 401(k)s are pre-tax contributions. As long as you earn less than around $96,000 as an individual, you can put in $6,000 ($5,000 plus $1,000 in catch-up funds) to your Roth, provided you earn at least that amount.

Should you stop contributing to the 401(k)? If you have had a good rate of return, and if the 401(k) has bounced back well after this latest market drop, then you may wish to continue to contribute to this account.

However, I like the idea of also having cash or investments in a Roth IRA. Roth IRAs, because they're funded with after-tax cash (the stuff that comes out of your wallet), grow tax-free forever. When it comes time to liquidate some of your retirement assets, you may wish to have an account that you can withdraw cash from without paying a huge tax bill.

Speaking of withdrawing cash, you may withdraw your Roth IRA contributions tax free and penalty free after 5 years for any reason. You may not touch the interest you've earned on those contributions until you're 59 1/2, the same age you can withdraw cash from your 401(k) penalty-free.

To find out more, read the IRS's Publication 590, Individual Retirement Arrangements.

FREE BOOK OFFER:

Take advantage of an offer for a FREE BOOK that will help you protect your finances and save for retirement: 50 Simple Steps You Can Take To Disaster-Proof Your Finances.

See more articles on this topic by clicking on the "RELATED ARTICLES" above and to the right.

We have over 5000 articles on Real Estate Advice, Personal Finance Advice and Consumer Advice on our site. We encourage you to look at these articles. As always, if you have a comment on our articles, don't forget to post your comment below. We thank you for coming to ThinkGlink.com.

© Ilyce R. Glink. All rights reserved. This content may not be used, distributed, syndicated, compiled or excerpted in any medium or form without written authorization from Think Glink, Inc. For information on syndicating ThinkGlink.com please contact us.

Previous article Next article