How to Invest in a Traditional IRA and a Roth IRA

When it comes to saving for retirement, Roth IRAs and traditional IRAs are some of the most popular ways to go about it. Though both individual retirement account options are different in their own right, the decision of which one to utilize isn’t binary. With enough planning on how to leverage both types of plans, you can maximize your return on investment and enjoy a more lucrative retirement.

Key Takeaways

  • As long as you keep your contributions within federal limits, 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.
  • Having both types of accounts will affect your taxes in different ways.

Do You Need a Roth and a Traditional IRA?

It may sound counterintuitive to split whatever money you plan on saving for retirement into two separate types of IRAs, but there’s financial strategy behind it. Financial planners like Douglas A. Boneparth, a certified financial planner and president of Bone Fide Wealth in New York City, believe that putting money in both types of retirement accounts—even if you’re already enrolled in an employer-sponsored Simplified Employee Pension (SEP) or Savings Incentive Match Plan for Employees (SIMPLE) IRA—can help you manage your taxes.

“The benefit to having pretax and Roth retirement dollars is that you can have greater control around tax planning during retirement,” Boneparth says. “You will have one account that comes out tax free and another that is taxable, allowing you to decide which is the better account to fund retirement from based on your tax environment.”

Roth IRA contributions are made after taxes, meaning that you won’t be taxed on the account’s principal when you take your money out later in life. Contributions to traditional IRAs are made pretax, so any money that you withdraw later in life will be subject to taxes. That being said, taxpayers are often able to claim a deduction on the contributions that they make to their traditional IRAs, so they can soften the blow that they’ll receive in retirement.

“Outside of having to manage two retirement accounts, there aren’t too many pitfalls to having a Roth IRA and traditional IRA,” Boneparth adds.

How to Use Two IRA Types

Having both retirement plan types can be beneficial. However, there are things that you have to remember when making your contributions. By following federal regulations, you can ensure that your retirement accounts will work as efficiently for you as you need them to.

Keep an Eye on Contribution Limits

The Internal Revenue Service (IRS) has specific limits on how much you can contribute to all of your traditional and Roth IRAs. That’s right—you can have more than one of each. Under current guidelines for 2022, your contributions cannot exceed $6,000. The only exception is if you are age 50 or older, which will allow you to contribute another $1,000 among your accounts as a catch-up mechanism.

Adjust Contributions Based on Income

For many Americans, some years are better than others when it comes to salary. Depending on which tax bracket you end up in during a given year, you may want to put more money into either your Roth IRA or your traditional IRA. On one hand, if you anticipate retiring at a lower tax bracket than you’re currently in, you may want to contribute more to the traditional IRA to pay lower taxes. On the other hand, if you expect to be in a higher tax bracket than your current year, you may want to put more money into your Roth IRA, since you won’t pay taxes on those withdrawals at all.

Start Contributing Early

To make the best of your retirement planning, you should start the process as early as possible. The more time that your money spends in a retirement account, the more that it can compound and grow. Later in life, if you feel that your money will be better served in a Roth IRA than a traditional IRA, you can always roll over the money.

Important

Though Roth IRAs do not have required minimum distributions, traditional IRAs do. After your 72nd birthday, you will need to begin withdrawing at least the minimum amount from your account and paying income taxes on those withdrawals.

Can having both types of IRA affect current taxes?

Maintaining both kinds of IRA—a traditional as well as a Roth—not only affects your taxes during retirement but also can land you tax savings today. Contributions to a traditional IRA can reduce your taxable income, allowing you to become eligible for a number of tax credits. For example, the Qualified Retirement Savings Contribution Credit provides up to 50% of your total contributions to an IRA or workplace retirement plan in tax credits. As long as your adjusted gross income (AGI) doesn’t exceed $34,000 as a single filer and $68,000 if married filing jointly, you can receive at least a portion of the credit for 2022.

Are withdrawals and distributions taxable?

Both IRA styles deal with your taxes in a specific way. Deductible contributions and earnings withdrawn or distributed through a traditional IRA are taxable. In a Roth IRA, contributions are immediately taxable, though withdrawals are not, as long as it’s a qualified distribution. Your Roth contributions may be withdrawn at any time, tax- and penalty-free. In both instances, you may be forced to pay an additional 10% tax for early withdrawals if you take money out before you are 59½ years old.

Can you over-contribute to an IRA?

Yes. If you make excess contributions, you’ll have to pay an additional 6% in taxes for each year that the extra amount exists in your account. The tax will end when you either withdraw the excess or use it as a future contribution.

The Bottom Line

Managing a traditional IRA as well as a Roth IRA can be a great way to take advantage of both worlds. Since you can ultimately roll your traditional IRA into the Roth, there’s little downside to at least trying to maximize both. Keep in mind the tax advantages and implications of both IRA types, and remember that there are income limits for contributing to a Roth IRA.

Article Sources

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  1. Internal Revenue Service. “Traditional and Roth IRAs.”

  2. Internal Revenue Service. “Retirement Plan and IRA Required Minimum Distributions FAQs.”

  3. Internal Revenue Service. “Retirement Topics — Required Minimum Distributions (RMDs).”

  4. Internal Revenue Service. “Retirement Savings Contributions Credit (Saver’s Credit).”

  5. Internal Revenue Service. “Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs).”

  6. Internal Revenue Service. “Retirement Topics — IRA Contribution Limits.”

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