You can invest in both a tax-deferred IRA and an after-tax Roth IRA as long as your total contribution doesn't exceed the IRS limits for the year.

The IRS limit for 2019 is $6,000 for both the traditional and the Roth IRA. If you're aged 50 or over, you can put in $1,000 more in either or both under a catchup provision.

Key Takeaways

  • You can contribute to one or more retirement account up to the limits permitted by the IRS.
  • If you have access to an employer plan, that's your best choice.
  • Check the upper income limits for Roth eligibility before deciding.

For example, a person under age 50 could contribute $3,000 to a traditional IRA in pre-tax dollars and another $3,000 to a Roth IRA in post-tax dollars. The income tax owed on the money paid into the traditional IRA contribution would be postponed until the money is withdrawn after retirement. The tax on the money paid into the Roth IRA would be paid up front.

If you can afford it and if you're eligible for both, that combination can be a big boost to your retirement savings.

IRA or Roth: How to Decide

If you're considering splitting your savings into two or more retirement investments, consider your options.

You may have the option to invest in both a traditional or a Roth IRA through an employer.

The maximum contribution for 2019 is $6,000 for one or more IRAs. If you're aged 50 or over, add another $1,000 to the limit.

Whether or not you do, if you can contribute to an employer’s 401(k) or a similar retirement plan, do that first. Here’s why:

  • Company retirement plans have higher contribution limits. For example, a 401(k) has a contribution limit of $19,000 for 2019. The tax-deferred status applies to the first $6,000.
  • Many employers match your contributions, which is essentially free money.

IRA and Roth Eligibility

There is no income limit on eligibility for a traditional IRA. That is, you can contribute up to the limit and defer income taxes on that money no matter what your income is.

There are income limits for Roth contributions, however. For the 2019 tax year, the limit is $122,000 in adjusted gross income for individuals and $193,000 for couples filing jointly. These higher-income filers can participate in a Roth IRA at a reduced rate.

Tax Implications

Contributions to a traditional IRA are deducted from your income. Your gross income is reduced, and the taxes you pay this year will go down with it. You will pay taxes due on both the contributions and the returns they generate when you withdraw the money after retiring.

Contributions to a Roth IRA are after-tax. You'll owe the taxes on that income when you file your tax return for this year. But that's it. The money you put in and the assets you take out after retirement are free of taxes.