How to Contribute to Both a Roth IRA and Traditional IRA in the Same Year
An IRA is a personal retirement plan that allows you to contribute money each year towards your retirement. The benefit of having an IRA account is that any interest the account earns, or any income from mutual funds or stocks, is not considered taxable income, so can continue to stay in the account until you retire. There are two types of IRA's, the Roth IRA and the traditional IRA. Most persons will choose to invest in either a Roth IRA or a Traditional IRA. However, it is possible to invest in both each year. This article will explore how to contribute to a Roth IRA and a Traditional IRA in the same year.
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Things You'll Need
- earned income
- meet the income requirements for traditional IRA and Roth IRA
Instructions
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Understand the contribution limits for an IRA for the year in which you wish to contribute to both a Roth IRA and traditional IRA. Starting in 2008, you can contribute up to $5,000 to an IRA. If you are over 50 years of age, you can contribute an extra $1,000.
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Meet the requirements for contributing to an IRA in general. The requirement is that you have earned income for the year. This means that you earned money during the year. Your contributions have to come from this money that you earned.
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Meet the requirements for the Roth IRA. The Roth IRA is easier to qualify for. You can use Publication 590 of the IRS (site listed in the resources) to determine if you meet the income requirements. For 2008, if you filed singly and made under $101,000, you can contribute the full amount. If you income is over that up to a certain point, you can make a partial contribution. At $116,000, you can no longer make a contribution. See the Ehow article in the resources for more information on Roth IRA investments.
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Meet the requirements for investing in a Traditional IRA. If you are under age 70.5 and have earned income, you can invest in a Traditional IRA. The only question is whether the contribution will be deductible. If you do not contribute to an employer sponsored retirement plan, and your income is less than a certain amount ($50,000 for filing singly in 2007), you will be able to deduct the full amount of your contribution up to the limits. Publication 590, listed in the resources, explains this in more detail.
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Set up a Roth IRA account and a Traditional IRA account with a brokerage firm like Raymond James or investment company like T Rowe Price. You need to set up two separate accounts. When you set up the account, you'll have to decide what to invest in. You can invest in stocks, bonds, certificates of deposit, and mutual funds, to name a few, with either type of IRA.
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Determine how much you will invest in each account and how you will invest it. You may wish to invest $2500 in both accounts all upfront right now. Or, you may wish to invest a certain amount per month.
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Make sure your total investment for the year does not exceed the $5,000 limit ($6,000 if you are over 50), or your own personal contribution limit based on your adjusted gross income.
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Tips & Warnings
You may also be able to take a retirement savings contribution credit for your IRA investment. See Publication 590 of the IRS to find out more about this added benefit.
When deciding how to invest your money, make sure you know the downsides for each type of IRA. For example, if you contribute to a traditional IRA, you get a 10% penalty on your money if you take any of it out before you reach age 59 1/2.
Realize that most brokerage firms or investment companies charge a fee each year for you to have an IRA account. This ranges anywhere from $10 to $30. If you have a Roth IRA and a traditional IRA, you may end up paying this fee twice. This can greatly reduce the returns you make on your contribution and/or any interest earned.
