IRAs and other tax-advantaged retirement accounts are a confusing world at times. It is important to have a thorough understanding of both IRS regulations and retirement account operations. Additionally, different financial institutions may have different strategies for positioning and selling their products, and investors may not always understand why this might be the case. For example, you can hold a bank-issued CD as a stand-alone IRA. However, you can also purchase a brokered CD from a business like Fidelity and store it in a brokerage account along with stocks, mutual funds, and other investment kinds. The good news is that IRA investing-related worries and inquiries can be answered by financial service providers like Fidelity.
Yes, you can contribute $5,000 to both a Roth IRA and a traditional IRA in the same year, but there are some important things to keep in mind. The total amount you can contribute to all of your IRAs (both traditional and Roth) is limited to $6,500 for 2023 ($7,500 if you are 50 or older). This means that if you contribute $5,000 to a Roth IRA, you can only contribute $1,500 to a traditional IRA.
Here’s a breakdown of the contribution limits for 2023:
- Under age 50: $6,500 total ($5,000 to Roth IRA, $1,500 to traditional IRA)
- Age 50 or older: $7,500 total ($5,000 to Roth IRA, $2,500 to traditional IRA)
It’s also important to note that your eligibility to contribute to a Roth IRA may be limited depending on your income. For 2023, if your modified adjusted gross income (MAGI) is $153,000 or more as someone filing as single, married filing separately, or head of household, you can’t contribute to a Roth IRA. The limit is $228,000 for those who are married filing jointly or are qualifying widow(er)s.
Here are some additional things to keep in mind about contributing to both a Roth IRA and a traditional IRA:
- Taxes: Contributions to a traditional IRA may be tax-deductible, depending on your income. However, withdrawals from a traditional IRA are taxed as income. Contributions to a Roth IRA are not tax-deductible, but withdrawals are tax-free in retirement.
- Investment options: The investment options available in a Roth IRA and a traditional IRA may vary depending on the custodian.
- Withdrawals: There are some exceptions to the 10% early withdrawal penalty for traditional IRAs, such as for qualified first-time home purchases or higher education expenses. However, there are no exceptions to the 10% early withdrawal penalty for Roth IRAs.
Frequently Asked Questions
Can I contribute to a Roth IRA and a traditional IRA in the same year?
Yes, you can contribute to a Roth IRA and a traditional IRA in the same year, but the total amount you can contribute to all of your IRAs (both traditional and Roth) is limited to $6,500 for 2023 ($7,500 if you are 50 or older).
What is the income limit for contributing to a Roth IRA?
For 2023, if your modified adjusted gross income (MAGI) is $153,000 or more as someone filing as single, married filing separately, or head of household, you can’t contribute to a Roth IRA. The limit is $228,000 for those who are married filing jointly or are qualifying widow(er)s.
Are contributions to a traditional IRA tax-deductible?
Contributions to a traditional IRA may be tax-deductible, depending on your income. However, withdrawals from a traditional IRA are taxed as income.
Are contributions to a Roth IRA tax-free?
Contributions to a Roth IRA are not tax-deductible, but withdrawals are tax-free in retirement.
Are there any exceptions to the 10% early withdrawal penalty for traditional IRAs?
Yes, there are some exceptions to the 10% early withdrawal penalty for traditional IRAs, such as for qualified first-time home purchases or higher education expenses. However, there are no exceptions to the 10% early withdrawal penalty for Roth IRAs.
What are the investment options available in a Roth IRA and a traditional IRA?
The investment options available in a Roth IRA and a traditional IRA may vary depending on the custodian.
What are the withdrawal rules for a Roth IRA and a traditional IRA?
Withdrawals from a Roth IRA are tax-free in retirement, provided that certain conditions are met. Withdrawals from a traditional IRA are taxed as income.
Contributing to both a Roth IRA and a traditional IRA can be a great way to save for retirement. However, it’s important to understand the rules and limitations of each type of IRA before you start contributing. If you’re not sure which type of IRA is right for you, you should talk to a financial advisor.
Misconception: You can’t contribute to a 401(k) and an IRA. Fact: You can contribute to a 401(k) and an IRA in the same year.
The nuances here are important to understand. Everyone with taxable compensation can contribute to a traditional IRA. Your ability to deduct your traditional IRA contribution may be restricted if you and/or your spouse are covered by a workplace retirement plan at work, such as a 401(k), and your income is above a certain threshold.
Your contributions to a Roth IRA are made with after-tax money and are not tax deductible, but if certain requirements are met, your money can grow federally tax-free and you can take withdrawals tax-free when you retire. 1 This is not like a traditional IRA: Traditional IRA withdrawals are subject to taxes Your spouse’s or your own retirement plan at work is not a requirement to be eligible to contribute to a Roth IRA. You can make contributions to a Roth IRA as long as your modified adjusted gross income (MAGI) is less than the annual limit and your taxable compensation is equal to or more than your contribution. 2.
The income and contribution caps for both traditional and Roth IRA contributions are listed below: IRA contribution limits
Misconception: An IRA is an investment. Fact: An IRA is a type of account.
Saving money for your financial future is a huge accomplishment. After making an IRA contribution, it’s critical to move forward and select investments that could increase your funds. Your ability to meet your objectives can be increased by investing for potential growth, which may even enable you to do so more quickly than you otherwise could.
The terminology can be confusing, though. An individual certificate of deposit, such as an IRA CD offered by a bank, may be designated as an IRA since an IRA is a specific kind of account. It is also applicable to a brokerage account, which provides a wide range of investment choices, such as mutual funds, stocks, bonds, CDs, and exchange-traded funds (ETFs).
Make sure you know what you’re getting when you open an account, how to choose investments, and how to add money in order to ensure that your savings are invested as you intend.
Fidelity provides a number of choices for expert investment management if you’re unsure about how to invest your IRA, lack the time to do it, or aren’t interested in handling your own investments.
A managed account is precisely that—an investment account that is overseen by financial experts. One of the primary advantages of a managed account is that the investments are professionally selected to match your time horizon, risk tolerance, and financial circumstances. They are then routinely rebalanced to keep your plan on course. Moreover, managed accounts may provide tax-loss harvesting and other strategies for tax-efficient investing. Comprehensive financial planning and generational strategies might be available in some circumstances.
The cost of a managed account is typically determined by the complexity of the services and financial needs that are needed, or it may be determined by the total amount of assets that you have to invest.
A robo advisor is a reasonably priced online financial advisor that leverages technology to assist in automating investing based on data that clients supply about their financial circumstances and themselves. “Robo” describes these services as being nearly entirely digital, accessed and interacting with your accounts through computers, smartphones, or tablets. The term “advisor” refers to financial advisors who provide account management and digital advice, frequently at a lower cost than traditional financial advisory services. Learn about Fidelitys robo advisor: Fidelity Go®.
For more comprehensive solutions, consider personalized investment management.