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One of the most popular retirement savings accounts is an IRA, and when opening one, you have to decide between the Roth and traditional varieties.
Navigating the world of retirement savings can be overwhelming, especially when it comes to choosing the right Individual Retirement Account (IRA) for your needs. Two popular options are the Roth IRA and the traditional IRA, each offering distinct advantages and disadvantages. This article explores the intricacies of both IRAs and helps you determine whether it makes sense to have both in your retirement portfolio.
Understanding Roth and Traditional IRAs
Roth IRA:
- Contributions are made with after-tax dollars, meaning you don’t receive an immediate tax deduction.
- The significant advantage of a Roth IRA lies in its tax-free withdrawals in retirement. Both your contributions and earnings grow tax-free, allowing you to enjoy the full benefit of your investments.
- There are income limitations for contributing to a Roth IRA. For 2024, the contribution limit is $7,000 ($8,000 if you’re 50 or older), and your modified adjusted gross income (MAGI) must be below certain thresholds.
Traditional IRA:
- Contributions are made with pre-tax dollars, resulting in an immediate tax deduction in the year you contribute. This can significantly lower your taxable income and provide immediate tax savings.
- However, when you withdraw funds in retirement, they are taxed as ordinary income. This can potentially lead to a higher tax bill in retirement, especially if you are in a higher tax bracket.
- There are also income limitations for deducting contributions to a traditional IRA. If you or your spouse have access to a workplace retirement plan like a 401(k), your ability to deduct contributions may be phased out depending on your income.
The Case for Having Both a Roth and Traditional IRA
While both IRAs offer unique benefits, having both in your portfolio can provide a powerful combination for maximizing your retirement savings and tax advantages. Here’s why:
- Tax Diversification: Combining a Roth and traditional IRA allows you to diversify your tax exposure in retirement. This can be particularly beneficial if you’re unsure what your tax bracket will be when you retire. With a Roth IRA, you’ll have tax-free withdrawals, while your traditional IRA will provide income that is taxed as ordinary income. This flexibility can help you manage your tax burden more effectively in retirement.
- Maximize Contribution Limits: The combined contribution limit for IRAs in 2024 is $7,000 ($8,000 if you’re 50 or older). By having both a Roth and traditional IRA, you can maximize your retirement savings potential by contributing to each account. This allows you to save more for retirement and potentially reach your financial goals faster.
- Flexibility in Withdrawals: Roth IRAs offer more flexibility in withdrawals. You can withdraw your contributions at any time without penalty, regardless of your age. This can be helpful if you need access to emergency funds or want to use your retirement savings for other purposes, such as a down payment on a home.
- Estate Planning: Roth IRAs can be a valuable tool for estate planning. When you leave a traditional IRA to your beneficiaries, they will have to pay taxes on the withdrawals. However, with a Roth IRA, your beneficiaries can withdraw the funds tax-free, potentially saving them a significant amount of money.
Considerations Before Opening Both IRAs
While having both a Roth and traditional IRA can be advantageous, there are a few considerations to keep in mind:
- Income Eligibility: As mentioned earlier, there are income limitations for contributing to both Roth and traditional IRAs. Ensure you meet the eligibility requirements before opening both accounts.
- Contribution Limits: Remember that the combined contribution limit for IRAs is $7,000 ($8,000 if you’re 50 or older) in 2024. You’ll need to decide how to allocate your contributions between the two accounts based on your financial goals and tax situation.
- Investment Options: The investment options available in Roth and traditional IRAs may vary depending on the custodian you choose. Compare the investment options offered by different custodians before opening accounts.
Ultimately, the decision of whether to have both a Roth and traditional IRA depends on your individual circumstances and financial goals. Consider your income, tax bracket, retirement savings goals, and estate planning needs to determine the best approach for you. If you’re unsure, consulting with a financial advisor can help you make an informed decision.
By understanding the nuances of each IRA and how they can complement each other, you can create a well-rounded retirement savings plan that maximizes your tax benefits and helps you achieve your financial objectives.
Traditional IRA income limits for 2023 and 2024
These income limitations only apply if your employer offers a retirement plan to you or your spouse. Modified adjusted gross income, or your adjusted gross income after certain deductions have been added back in, is the basis for the limits.
|
Filing status |
2023 income range |
2024 income range |
Deduction limit |
|---|---|---|---|
|
Single or head of household (and covered by retirement plan at work) |
$73,000 or less. |
$77,000 or less. |
Full deduction. |
|
More than $73,000, but less than $83,000. |
More than $77,000, but less than $87,000. |
Partial deduction. |
|
|
$83,000 or more. |
$87,000 or more. |
No deduction. |
|
|
Married filing jointly (and covered by retirement plan at work) |
$116,000 or less. |
$123,000 or less. |
Full deduction. |
|
More than $116,000, but less than $136,000. |
More than $123,000, but less than $143,000. |
Partial deduction. |
|
|
$136,000 or more. |
$143,000 or more. |
No deduction. |
|
|
Married filing jointly (spouse covered by retirement plan at work) |
$218,000 or less. |
$230,000 or less. |
Full deduction. |
|
More than $218,000, but less than $228,000. |
More than $230,000, but less than $240,000. |
Partial deduction. |
|
|
$228,000 or more. |
$240,000 or more. |
No deduction. |
|
|
Married filing separately (you or spouse covered by retirement plan at work) |
Less than $10,000. |
Less than $10,000. |
Partial deduction. |
|
$10,000 or more. |
$10,000 or more. |
No deduction. |
Roth IRA income limits for 2023 and 2024
Modified adjusted gross income, or your adjusted gross income after certain deductions have been added back in, serves as the basis for these income limits.
|
Filing status |
2023-2024 Income range |
Maximum annual contribution |
|---|---|---|
|
Single, head of household or married filing separately (if you didnt live with spouse during year) |
|
|
|
Contribution is reduced. |
|
|
No contribution allowed. |
|
|
Married filing jointly or qualifying widow(er) |
|
|
|
Contribution is reduced |
|
|
No contribution allowed |
|
|
Married filing separately (if you lived with spouse at any time during year) |
Less than $10,000 |
Contribution is reduced |
|
$10,000 or more |
No contribution allowed |
If you’re ineligible for a Roth IRA, learn how a backdoor Roth IRA could help you obtain one nonetheless.
It’s important to note that you can fund both a traditional and a Roth IRA in the same year, provided that your total contributions stay under the maximum amount that can be made (which is $7,000 in 2024; $8,000 if you’re 50 or older).
Our selections of the top traditional and Roth IRAs
Why Roth Investments Are Better Than Traditional
FAQ
Does it make sense to have both a Roth and traditional IRA?
Can you contribute $6000 to both Roth and traditional IRA?
At what age does a Roth IRA not make sense?
Can I contribute to a Roth IRA and a traditional IRA in the same year?
Can you contribute to a Roth IRA and a traditional IRA?
Worth noting: You can contribute to a traditional and a Roth IRA during the same year, as long as the total amount does not exceed the maximum allowable contribution limit: $7,000 in 2024 ($8,000 if age 50 or older). Track your finances all in one place.
What is the difference between a Roth IRA and a traditional IRA?
The main difference between a Roth IRA and a traditional IRA is how and when you get a tax break. Contributions to traditional IRAs are tax-deductible, but withdrawals in retirement are taxable. In comparison, contributions to Roth IRAs are not tax-deductible, but the withdrawals in retirement are tax-free.
Can you have a Roth IRA and a traditional IRA at the same time?
You can have both individual retirement accounts—a Roth and a traditional—at the same time. Depending on when you start, you may want to focus more on one type of retirement plan over the other. Roth IRA contributions may grow tax-free, though you won’t get any immediate tax deductions to reduce your current tax liability.
Should I invest in a traditional IRA or a Roth IRA?
Therefore, there are both current and future tax considerations to be made when investing in both a traditional IRA and Roth IRA. Having both retirement plan types can be beneficial. However, there are things that you have to remember when making your contributions.