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.

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