Roth IRA vs. Traditional IRA and 401k: What Hourly Financial Planning Clients Should Know

Discussing retirement account access at Miriam Lake in the Lost River Range
Hi everybody, I am at Merriam Lake today in the Lost River Range. This is one of my favorite places and I haven't been here for about three years, so glad to have made it. I'm going to talk to you real quick about Roth IRAs versus regular IRAs or pre-tax 401ks, and we're going to talk about access to your money today.
Understanding Retirement Account Rules for Hourly Financial Planning Clients
All of these accounts are designed to be retirement accounts, so the plan is for you to leave the money in there until you're at least 59 and a half, at which time you can take the money out without penalty.
Now, there are some exceptions, and I'll talk about those in more detail in another video. They include being a first-time home buyer or some other things. In those cases you can get your money out without a penalty, but you may still have to pay taxes.
Pre-Tax 401ks and Traditional IRAs: Taxable Withdrawals and Penalties
Otherwise, there are still some differences. In a pre-tax 401k or in a regular IRA, any money that you take out prior to 59 and a half without these exceptions is taxable and is subject to a 10% penalty if you get the money out.
Now, you do have in most 401k plans an option to borrow money. Normally these plans—it all depends on your plan—but normally they'll let you borrow up to half of your value or fifty thousand dollars, whichever is more. But you have to check your specific plan for details.
Roth IRAs and Roth 401ks: Access to Contributions Without Penalty
In a Roth IRA or a Roth 401k, there's another exception in the tax code. Since you're putting money into those that you've already paid tax on, then you're able to take out your contributions at any time without any tax penalty, without paying tax, without paying a penalty.
What you're not allowed to access are the earnings. So if you put in five thousand dollars this year, and two years from now you've got seven thousand dollars in there, you can take out five thousand dollars without any kind of penalty. You just have to leave the earnings in there.
Now, that's not the plan—you want to leave it in there for retirement—but it does give you a little bit more access than a normal IRA or than a normal 401k.
Plan-Specific Rules for Roth 401ks and Traditional 401ks
With the Roth 401k or with any 401k plan, you have to check your specific plan rules on how they let you take money out, because they may differ somewhat and be more restrictive than the tax code.