Can You Have a Tradtional & Roth IRA?
Both Roth IRAs and traditional IRAs offer tax-advantaged ways of saving for retirement, but they differ from each other in the way that the tax benefits work. Individuals can have both types of IRAs provided they meet the income requirements for the Roth IRA when they are contributing. Using both forms of retirement accounts can provide valuable tax benefits to savers.
Other People Are Reading
-
Benefits of Diversification
-
Traditional IRAs allow savers to deduct the value of their IRA contributions from their taxable income for the contribution year. Once the IRA owner reaches age 59½, he can withdraw the money and its earnings and will pay income tax on the amount he withdraws. This is a benefit if your later-in-life income falls into a lower bracket than your current income. Roth IRAs work in an opposite fashion: savers deposit money now and pay tax on it but do not have to pay tax on any earnings they withdraw after age 59½. This is helpful if your current tax bracket is lower than your anticipated bracket later in life, or if you have a long period of time to accumulate earnings. Because tax rules can change over time, many savers hedge their bets and split money between the two account types, spreading out their tax obligation over time.
Roth IRA Income Limits
-
While anyone can have both a Roth IRA and a traditional IRA at the same time, you can only make contributions to the Roth IRA if your adjusted gross income is below the IRS limit. In 2011, this limit was $120,000 for single tax filers and $177,000 for married tax filers. Those with incomes nearing that value fall into a phaseout range, where their Roth contribution limit is reduced. See Worksheet 2-1 and 2-2 of IRS Publication 590 to calculate your adjusted gross income for Roth purposes as well as your adjusted contribution limit, if applicable. Keep in mind that these limits are updated from time to time -- you may be able to contribute in the future even if your income is too high now.
-
Traditional IRA Deduction Limits
-
If you are covered by a retirement account at work, your tax deduction for traditional IRA contributions may be reduced or eliminated. This is critical to those who are considering both types of IRAs, as the deduction phaseout income begins as low as $56,000 for single filers in 2011. If you cannot deduct your traditional IRA contributions, there is little value in adding to that IRA if you qualify for a Roth, since traditional IRA earnings are taxed and Roth earnings are not.
Annual Contribution Limits
-
The annual contribution limit for IRAs applies to both types -- each individual can contribute to one or a combination of both IRAs up to the limit. In 2011, individuals under 50 years of age were allowed $5,000 in total IRA contributions, while those over 50 were allowed $6,000. You can split your money any way you like between the two accounts, and you do not need to contribute to both accounts every year.
-
