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.

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