Matt Stead
Contributing to a traditional IRA lets you grow your retirement savings throughout your career. So does contributing to a Roth IRA. Both kinds of accounts have tax benefits and drawbacks; both kinds of accounts can help you afford the kind of retirement you envision. So we’re often asked: What kind of IRA should I have? And can you have a Roth and traditional IRA at the same time?
If you’re new to the world of IRAs, here’s a quick primer. Traditional IRAs were created in the 1970s as a portable way of saving for retirement. Because an IRA isn’t tied to a worker’s employer, you can keep your IRA no matter where you work. The Roth IRA (named for a Senator who sponsored the legislation) was introduced in 1997 as an alternative to the traditional IRA.
Generally, contributions to a traditional IRA are made with pre-tax dollars, so putting money in a traditional IRA may reduce your taxable income for that year. But you’ll pay tax on the money you withdraw in retirement. By contrast, contributions to a Roth IRA are made with after-tax dollars. Later, you can take distributions without paying taxes. Traditional IRAs have required minimum distributions starting at age 72, while Roth IRAs don’t require RMDs unless the account is inherited after the original owner dies.
Can You Have a Roth and Traditional IRA?
Understandably, there’s a lot of confusion around how these two kinds of accounts compare. The short answer to the question of can you have a Roth and traditional IRA is yes. The IRS doesn’t prevent individuals from maintaining both types of investment accounts, and this strategy works well for some people. No matter how carefully you plan for your financial future, some things are unpredictable. Having both a taxable and tax-free source of income could prove useful in your retirement.
So, yes, technically you can have a Roth and traditional IRA—but not everyone will qualify for both. Your income may make you ineligible to contribute to a Roth account. The IRS uses your modified annual gross income and your filing status to determine how much, if anything, you’re allowed to contribute to a Roth IRA. For 2021, the income limit is $208,000 for joint filers and $140,000 for single filers. If your income regularly exceeds the Roth contribution limits, a traditional IRA may be the better choice; you can make contributions during any year in which you have taxable income.
(That said, with either kind of IRA your income will affect whether or not you can deduct any contributions you make. High-income taxpayers may not be entitled to any deduction. To determine how much if any deduction you can take, the IRS considers your filing status, modified AGI and whether or not you’re covered by a retirement plan through an employer. The income cap for allowed deductions is significantly higher if you’re not covered by an employer’s plan.)
Note that having both types of accounts won’t help you double how much you’re putting aside each year. The IRS imposes an annual limit for IRA contributions. For 2020 and 2021, the contribution limit is $6,000 per individual, or $7,000 for taxpayers 50 or older. That limit applies to your total IRA contributions. If you’re under 50 and contribute $5,000 to a traditional IRA, you’ll only be able to contribute up to $1,000 to a Roth IRA in the same year.
Should You Have a Roth and Traditional IRA?
Just because you can have both these kinds of IRAs doesn’t mean you should. We can’t answer this question definitively, because your specific financial picture and goals are going to determine whether you get value in having both kinds of accounts. The answer to this question largely depends on whether you think your tax rate will go up or down between now and the time when you’re ready to access your money. Naturally, that requires some guesswork, but your tax advisor can also help you anticipate the best choice for you.
Your expected tax rate in retirement isn’t the only consideration, however. If you’re married, your spouse’s income and retirement accounts may also factor into the decisions you can make around IRAs. You may each have and contribute to individual accounts if you both earn taxable income. If one spouse doesn’t work outside the home, the working spouse may be able to contribute to a spousal IRA in the non-working spouse’s name. You’ll also want to consider whether you want to take RMDs starting in your early 70s, as is required of a traditional IRA only.
Because there are so many moving parts involved, I strongly urge you to consult your financial advisor and/or tax planner before making decisions around Roth or traditional IRAs. The IRA strategy that works for someone else won’t necessarily be the most profitable strategy for you. We can work with your real numbers to make projections and identify the savings strategy that maximizes your retirement money.
Sachetta Callahan knows that each client is unique, and that your financial goals are about more than just the numbers in your bank account. We’re here to help you make the decisions that let you create the future you want for yourself and your loved ones.
Remember, you don’t have to know yet what kind of IRA is right for you. Let’s figure it out together. Contact me today!
Matthew Stead joined Sachetta Callahan in 2014 as an intern. He now serves as a financial advisor, the go-to office IT person and the host of Sachetta Callahan’s podcast Fine Answers.