Progressing down Easy Street, a larger building looms through the trees. Rounding a corner, it is apparent that this home has two separate and distinct front doors, but it is not a duplex. There is one owner/resident. The name on the mailbox explains the house with two front doors. It reads, “401(k) Account w/Roth Component.” This makes sense. The signs over the two front doors are exactly the same as the signs over the traditional and Roth IRA doors. One reads, “Taxable,” the other, “Tax-Free.” Two doors, but funds enter a single structure.
Upon inspection inside, the “401(k) Account w/Roth Component” house has a more limited selection of furniture than the IRA houses. Typically, there are no extravagant sculptures or wild investment paintings in a 401(k) house. The 401(k) homeowner can only choose investment furniture from an approved list of sturdy, heavily scrutinized items. While taxable and tax-free dollars can sit on the same approved mutual fund couch within the 401(k) home, it must be an approved couch, and the taxable and tax-free dollars must enter and leave through their own doors.
Not all 401(k) houses have two doors. Some only provide access through a door with an “earnings will be taxable” sign overhead. These 401(k) buildings can be remodeled to add a “tax-free Roth” door, but it is not required. Building codes dictate you cannot construct a 401(k) house with only a “tax-free Roth” door. There must be a “taxable” entry point.
Regardless of the retirement home where your assets reside, be sure to keep it clean and orderly. Mow the lawn and tend to necessary repairs. Have your investment furniture reviewed at least annually by a competent and trusted advisor, and hopefully your house on Easy Street will soon be filled to the ceiling!
I am an Ed Slott Master Elite trained IRA Specialist and I would like to help you. If you have any questions regarding this article or would like to schedule a complimentary consultation please call my office at 845-627-8300. My Client Service Coordinator Susan will be happy to set up a convenient time so I can help.
Beth Blecker, CEO