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

  • 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.
  • Roth IRA contributions may grow tax-free, though you won't get any immediate tax deductions to reduce your current tax liability
  • Traditional IRA contributions allow for immediate tax deductibility, though earnings in the account are taxable when withdrawn for retirement.
  • There are income and contributions limits to be mindful of when contributing to either or both accounts.

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 a financial strategy behind it. As each type of account boasts different rules and tax benefits, investors can capitalize on having each type of account to maintain financial flexibility in retirement.

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. Therefore, there are both current and future tax considerations to be made when investing in both a traditional IRA and Roth IRA.

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. This means keeping careful track of activity in both accounts while still keeping each record separately.

If you create both a traditional IRA and Roth IRA with the same broker, be mindful that both accounts will reside within the same online login. This is especially important to consider when making contributions or withdrawals, as the two types of accounts may be easily confused.

Last, consult your financial advisor about the tax strategies for both accounts. Very broadly speaking, a Roth IRA is better for lower-income individuals who expect to move to higher-income tax brackets in the future. On the other hand, higher-earners may appreciate the immediate tax deductions and do not necessarily expect to need future tax benefits.

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. Each contribution limit below is the aggregate total contributed to each account.

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.

Current guidelines for 2023 have increased your contribution limit. Individuals can contribute no more than $6,500 unless they are age 50 or older. The same catch-up contribution for $1,000 applies in 2023.

Income Considerations - Roth IRA Contributions

You can not make Roth IRA contributions if you make too much money. In addition, the contribution limits above may be reduced if you earn a specific amount. The table below outlines the phase-out ranges for 2022 and 2023 based on your modified adjusted gross income (MAGI).

Roth IRA Contribution Limits (Based on MAGI)
 Filing Status 2022 MAGI 2023 MAGI Roth IRA Contribution Limit
Single or Head of Household Less than $129,000 Less than $138,000 Full contribution allowed
  Between $129,000 and $144,000 Between $138,000 and $153,000 Partial contribution allowed
  $144,000 or greater $153,000 or greater No contribution allowed
Married Filing Jointly Less than $204,000 Less than $218,000 Full contribution allowed
  Between $204,000 and $214,000 Between $218,000 and $228,000 Partial contribution allowed
  $214,000 or greater $228,000 or greater No contribution allowed
Married Filing Separately $0 to $10,000 $0 to $10,000 Partial contribution allowed
Greater than $10,000 Greater than $10,000 No contribution allowed

Income Considerations - Traditional IRA Deductions

In order for your contributions to your traditional IRA to be deductible, you must meet certain income thresholds. If you make too much money, your contributions may be fully excluded from deduction. Be mindful that the phase-out ranges mentioned below assume you are covered by a workplace retirement plan; different phase-out ranges may be applicable to your situation if this is not true for you.

Traditional IRA Contribution Deduction Eligibility
Filing Status 2022 MAGI Range 2023 MAGI Range Deduction Eligibility
Single Below $68,000 Below $73,000 Full deduction allowed
  Between $68,000 and $78,000 Between $73,000 and $83,000 Partial deduction allowed
  Greater than $78,000 Greater than $83,000 No deduction allowed
Married Filing Jointly Below $109,000 Below $116,000 Full deduction allowed
  Between $109,000 and $129,000 Between $116,000 and $136,000 Partial deduction allowed
  Greater than $129,000 Greater than $136,000 No deduction allowed
Married Filing Separately Between $0 and $10,000 Between $0 and $10,000 Partial deduction allowed
Greater than $10,000 Greater than $10,000 No deduction allowed

Broad IRA Contribution Strategy

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 today. The fact that future earnings will be taxed is less of a concern because you expect to shift into a lower tax bracket in the future.

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. Though you won't get any immediate tax deductions, this is less of a concern because you are currently in a lower tax bracket. This strategy results in your receiving the greatest tax benefit when your tax bracket is highest.

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.

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.

Can Have Both Types of IRAs 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. For 2023, these thresholds are increased to $36,750 for a single filer or $73,000 for a married couple filing a joint return.

Are Withdrawals and Distributions from an IRA 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 Into an IRA?

Yes. If you make excess contributions, you’ll have to pay additional 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. "401(k) Limit Increases to $22,500 for 2023, IRA Limit Rises to $6,500."

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

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

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

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

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

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