A:

Yes, an individual can contribute to both a Roth IRA and a Traditional IRA in the same year. The total contribution into both cannot exceed $5,500 for individuals under 50, and $6,500 for those 50 and over. For example, a person can contribute $2,500 into a Traditional IRA and $3,000 into a Roth IRA for the 2016 tax year. Additional conditions must meet IRS requirements as well.

There are a number of factors that should be considered when deciding between these IRA contributions, or potentially a combination of both:

  • Whether or not individuals are able to make retirement plan contributions (401k, 403b, or other qualified plan) through their company
  • Income limits for Roth IRA contributions
  • The current tax rate
  • Roth IRA and Traditional IRA characteristics

Retirement plan eligibility

If individuals can contribute into their company’s retirement plan (401k, 403b, etc.), they should choose these first. Once they make that maximum contribution into their retirement plans, they may want to consider making IRA or Roth IRA contributions. I make this suggestion because company retirement plans have higher contribution limits (401(k)s, for example, carry a current maximum of $18,500) than IRAs / Roth IRAs ($5,500). Retirement plan contributions reduce an individual’s income taxes. If you are unsure whether your company offers a retirement plan, you should contact your HR department or your boss.

If your company does not have a retirement plan, consider the factors below to determine what is right for you.

Income Limits for Roth IRA Contributions

Currently, individuals can make Roth IRA contributions if they have earned income and their taxable compensation is less than $131,000 for single filing or $193,000 for married couples.

Current tax rate

If not eligible to make a retirement plan contribution, an individual can make a tax-deductible IRA contribution, which will reduce his or her income tax. There is no rule of thumb to follow, but I would suggest that those in the 25% tax bracket or higher should make a tax-deductible IRA contribution instead of a Roth IRA contribution. (The 25% tax bracket applies to individuals earning $37,4510 to $90,750.)

The big advantage in making Roth IRA contributions if you are young and don’t mind paying a little more in taxes? Contributions into a Roth IRA grow tax free and all distributions (withdrawals) are also tax free.

Roth IRA and Traditional IRA Characteristics

Contributions into a Roth IRA are after-tax. As mentioned above, assets in these accounts grow tax free and all distributions are also tax free. Contributions into a Traditional IRA, on the other hand, are generally tax deductible, while all contributions and earnings are tax deferred. Once distributions are made, these are taxable. IRAs are required to make distributions to account holders, beginning when they reach the age of 70.5 years.

Contributions into Roth IRAs generally favor investors who are younger, with lower taxable incomes. For example, a Traditional IRA contribution is worth more to a person who earns $100,000 per year than a person who earns $35,000. That’s because the $5,500 contribution saves approximately $1,158 in federal income taxes for the person earning $100,000—and saves $752 for the person earning $35,000. In short, an individual earning $35,000 should consider contributing into a Roth IRA instead.

RELATED FAQS
  1. How do I open a Roth IRA if my Husband and I make over $300k?

    Between my husband and I, we make around 350k to 400k a year.  ... Read Answer >>
  2. I want to take advantage of retirement savings. Can I contribute $6K to a Roth IRA, ...

  3. Can I contribute $3,000 to my Simple IRA at work and $6500 to my personal Roth IRA?

    I am 59 years old. The total amount to both would be $9500, as described above. ... Read Answer >>
  4. Do we qualify for a back-door Roth IRA?

    My husband and I already max out our employee sponsored 401ks. We want to also open a Roth IRA using the "back-door ... Read Answer >>
  5. Are contribution limits the same for 401k plans as they are for personal IRAs?

    In other words, could I contribute $24k this year to my 401k (I am over 50)? If I decided not to participate, could I put ... Read Answer >>
  6. How can I fund A Roth IRA if my income is too high to make direct contributions?

    Roth IRAs are not available to you if you are a high income earner - unless you use the following strategy. Read Answer >>
Related Articles
  1. Retirement

    Roth IRA Contribution Rules: The Basics

    What you need to know about Roth IRA contributions – from eligibility to dollar limits, deadlines to tax breaks.
  2. Retirement

    Roth IRA Contribution Limits in 2016

    Discover the benefits of Roth IRA accounts and how much you can contribute for your retirement. Learn which IRA plan is best for you.
  3. Retirement

    How a Roth IRA Works After Retirement

    What retirees need to know about taxes, distributions and passing on your unspent savings to the next generation.
  4. Financial Advisor

    Why Some Advisors are Shy to Convert Roth IRAs

    Potential upcoming changes from the Obama Administration could hit rollovers from traditional to Roth IRAs, and that has advisors reluctant to convert.
  5. Retirement

    How Much It Takes to Max Out Your IRA

    IRAs have certain tax advantages that allow your nest egg to grow at a faster rate. But there are annual limits on how much you can contribute.
  6. Retirement

    Funding Your IRA vs. Your Roth IRA, Which First?

    The answer depends on where you are in your career and personal life each year. Here are some scenarios and rules to think about.
  7. Retirement

    IRA Contribution Limits in 2016

    Find out about the 2016 limits for contributions and income thresholds for individual retirement accounts, including traditional IRAs and Roth IRAs.
  8. Financial Advisor

    7 Top IRA Strategies for Your Clients

    With IRA season in full swing, advisors should consider these seven strategies for clients.
  9. Retirement

    Don't Make These Top 10 Mistakes On Your Roth IRA

    Don't lose out on the benefits of a Roth by contributing too much, breaking rollover rules or making other avoidable errors.
  10. Retirement

    Roth IRA Vs. Traditional IRA

    Learn more about the differences between a Roth IRA and traditional IRA.
RELATED TERMS
  1. Roth IRA

    An individual retirement plan that bears many similarities to ...
  2. Individual Retirement Account - IRA

    An investing tool used by individuals to earn and earmark funds ...
  3. IRS Publication 590: Individual Retirement Arrangements (IRAs)

    A document published by the Internal Revenue Service (IRS) that ...
  4. Roth IRA Conversion

    A reportable movement of assets from a Traditional, SEP or SIMPLE ...
  5. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  6. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center