Does it make sense in some cases not to use a Roth IRA / 401(k) for savings?

Question

I'm 21 and as I prepare to graduate college I'm trying to get a handle on how best to achieve my financial goals. From reading this site I often see people preaching the benefits of maxing out your 401(k) (with employer matching) and Roth IRA before worrying about any other forms of investing. My concern is that these then lock that money away for the next 40 years, but my current 10 year plan involves saving as much money as possible to then invest in myself. Personally I hope to buy land and develop it, but this could apply to anyone with entrepreneurial aspirations.

If you have a plan for how you hope to use the money now rather than later does it make sense to hold onto it?

Answer 1

401(k) can come in traditional and Roth forms, as can IRAs. Roth IRA money is not locked away for 40 years, only the earnings are locked away, and earnings can also be withdrawn for special cases.

You might not be able to invest in an IRA if your income is too high, and if you don't get a match for your 401(k), that might not be the best option either. The biggest advantage of the 401(k) is the match (if it exists) if there's no match, the second biggest advantage is the tax deferral. If you are in a low tax bracket, that isn't as big of an advantage either. I would say that there are plenty of reasons why you might not max out the 401(k) for savings, but it's pretty easy to max out the Roth IRA if that makes more sense, so there aren't a lot of reasons why not.

Answer 2

Comparing retirement savings to ordinary investment is not an apples-to-apples comparison - retirement savings are savings for retirement - if you want to invest in things now and live off of (or reinvest) those earnings, then retirement accounts are not the right vehicle.

That said, here are some benefits of the main types of retirement accounts:

Benefits of a 401(k):

• Employer match - you get an instant 100% return on your contribution (or whatever the match is)
• Tax-deferred savings - you don't pay tax until you withdraw from the account

Benefits of a tratitional IRA:

• Tax-deferred savings - same as above

Benefits of a ROTH 401(k):

• Employer match - same as above
• Tax-free growth - you only pay tax on what you contribute (since contributions are after-tax) - you pay no tax when you withdraw from the account

Benefits of a ROTH IRA:

• Tax-free growth - same as above

(the benefits above are not exhaustive, there are other benefits such as using a ROTH IRA for higher ed. expenses, etc. but those are the highlights)

If you have a plan for how you hope to use the money now rather than later does it make sense to hold onto it?

If your plan is meant to provide income at retirement, and earns returns higher than the returns plus matches and tax benefits you get from retirement accounts, then yes, it may make more sense, but those benefits are generally very hard to beat. Plus, having the money locked away in an account that is painful to tap can be a good thing - you're less tempted to use that money for foolish decisions (which everyone makes at some point).