As the table above details, the Traditional IRA and Roth IRA provide different tax advantages. If you and your financial professional decide having both accounts is right for you, the flexibility could potentially be beneficial now and in retirement. Here are three scenarios to consider.
Additionally, your income levels may change as you move through your career. In past years, you may have fallen under the MAGI limits and qualified for a full or partial deduction on Traditional IRA contributions. But in years where a full or partial tax deduction is unavailable, investors may be less inclined to contribute funds with no tax advantage, knowing those funds will also be taxed when withdrawn from the account down the road.
Having both accounts may also provide investors the ability to continue contributing to an IRA after age 70½. A Traditional IRA doesn’t allow contributions after age 70½, but it’s possible to contribute to a Roth IRA at any age (assuming you have taxable income and fall under the MAGI limits).
It’s important to note that the IRA contribution limits set by the IRS each year apply to all IRAs an individual may have. For the 2017 and 2018 tax years, the maximum contribution limit is $5,500 (or $6,500 if over 50). That’s the limit on what can be contributed between both a Traditional and a Roth IRA in a given year. However, it may be possible to split contributions between the two accounts – providing the flexibility and control for you to decide what’s best each year.
2) Having both accounts may provide flexibility when planning and managing your investment portfolio.
Which account is best for growth or value stocks? Should income-producing assets be held in a Traditional or Roth? What about REITs, rental properties, notes or other alternative investments?
These are questions for your advisor or financial professional, but having both a Traditional and a Roth IRA arms you and your advisor with options.
3) Having both accounts may provide tax flexibility during retirement when withdrawing funds.
After age 59½, it’s possible to withdraw funds from both Traditional and Roth IRAs without penalty (assuming the Roth IRA has been established for at least 5 years). After years of tax-advantaged growth inside the IRA, taxes are once again front-and-center in the distribution phase.
Distributions from a Traditional IRA are considered ordinary income (thus adding the amount you distribute to your modified adjusted gross income (MAGI) levels for that year) and are taxed at your ordinary income tax rate. Roth IRA distributions, on the other hand, are tax-free.
Due to its complexity, you should work closely with your financial advisor or tax professional when planning IRA distributions. However, those with both Traditional and Roth accounts may have added flexibility and can elect how much, when, and from which account they plan to distribute funds.
When the account holder reaches age 70½, required minimum distributions (RMDs) begin for Traditional IRAs. A Roth IRA doesn’t have that requirement. Having both account types could provide options and flexibility during this phase as well.
As mentioned earlier, Roth accounts may provide an added benefit after the IRS retirement age of 59½. Unlike Traditional IRAs, there is no age limit for making contributions to a Roth IRA – allowing those with earned income to continue saving money in a tax-free environment.
Finally, since the Roth IRA is not subject to RMDs, it may be possible to pass down a Roth IRA (and all cash and assets held in the account) to a beneficiary when the account owner passes. The beneficiary can maintain the tax-free account and continue investing or may immediately distribute cash and assets tax-free.
As you’ve read, it’s possible to have both a Traditional IRA and a Roth IRA and there could be potential benefits to having both. Since everyone’s situation is unique, it’s important to consult with your financial advisor, CPA or tax professional before making any financial decisions.
Download the Traditional & Roth IRA Comparison infographic for a handy resource detailing features of each account.