Can You Have Both a Roth and Traditional IRA?
February 14, 2023
Raiz answers the question of if you can have both a Roth IRA and Traditional IRA.
An Individual Retirement Account (IRA) can provide a good way to save on taxes and prepare for retirement. As opposed to an employer sponsored retirement plan like a 401k plan, these are individual retirement accounts that you set up yourself. There are two basic types of accounts: the traditional IRA and the Roth IRA.
When the time comes to set up an IRA, you may feel conflicted about which type of IRA is right for you. But do you really have to choose? When preparing your retirement plan, there could be a way to have your cake and eat it too.
We are here to help you explore your options and discover the answer to that exact question.
Roth IRA vs. Traditional IRA
Though they bear some similarities, there are distinct differences between traditional IRA’s and Roth IRA’s. Before you make any decisions regarding your future investments, it’s smart to understand the differences and how they would affect you if you chose one or the other.
With a traditional IRA, the money you contribute to your account will be deducted from your taxable income and not counted on your annual tax return. Therefore, saving for retirement may put you in a lower tax bracket as well.
However, both the contribution and the interest it earns will only be tax-deferred upon withdrawal. You can begin withdrawing funds after the age 59½ but, keep in mind, you must take minimum distributions by the age of 72 in order to avoid penalties.
If you find yourself needing an early withdrawal from your account, you will be charged with a 10% penalty fee and in most cases this becomes taxable income as well.
Exceptions to early withdrawal fees for Traditional IRA’s include:
- Disability or death
- Birth or adoption expenses
- Health insurance (in the case of prolonged unemployment)
- Medical expenses
- Education expenses
- First-time home purchases
The main difference with a Roth IRA is that you will make your contributions with money that has already been taxed.
This means that you still have to report the money you’ve contributed to your Roth IRA as taxable income on your annual tax return for that year; however, the interest earned afterwards is considered tax-free. Unlike with a traditional IRA, there will be no taxes to pay when you withdraw your funds in retirement.
With a Roth IRA, you can still begin your withdrawals at the age 59½—but this is just an option. There are no requirements that you must start withdrawals at this time, which means you can choose to begin withdrawing funds later—or not at all. If you so desire, you can let your interest continue to build instead.
Roth IRA accounts may also charge a 10% penalty fee for early withdrawal unless your withdrawal meets the criteria below.
Exceptions to the Roth IRA penalty fees would include:
- Birth or adoption expenses
- First-time home purchases
- College or higher education costs
Understanding Eligibility Requirements for Each IRA
If you are considering a Roth IRA or Traditional IRA, know that the eligibility requirements vary for each.
Your decision to open either (or both) will rely in part on whether you meet all the requirements. With a traditional IRA, you can contribute to your IRA at any age, but only if you (or your spouse if filing jointly) have taxable compensation. Roth IRA’s, however, have more specific qualifications than that of traditional IRA’s. You can make a Roth contribution at any age if you (or your spouse if filing jointly) have taxable compensation and your modified adjusted gross income falls under the maximum allowed amounts. If your adjusted gross income is over the max, you may qualify for a partial contribution maximum. These amounts are often adjusted year by year, so it is a good idea to look at the most recent updates before deciding one way or the other.
Can You Have Both a Traditional IRA and a Roth IRA?
The short answer is YES.
Because both types of IRA’s have different features, people researching their options sometimes feel torn about which one to choose. Yet there are actually no restrictions in place regarding how many IRA’s you can own and contribute to.
So for many people, the question of which type of IRA to choose really is a false dichotomy.
The good news is that it is not only possible to have both a Roth IRA and a traditional IRA, but for many people, it also just makes sense to have one of each and contribute to both.
This can help build wealth and spread out tax liability at the same time.
As long as you meet eligibility requirements, such as having earned income, you can contribute to both a Roth and a traditional IRA. How much you contribute to each is up to you, as long as you don’t exceed the combined annual contribution limit of $6,500 or $7,500 if you’re 50 or older for 2023. (Investopedia)
Contributing to both a Roth IRA and traditional IRA offers distinct benefits:
- You can diversify your investments. Whatever investments you make—including IRA’s—it is always smart to diversify. Spreading your investments out over multiple channels reduces your risks of experiencing huge losses if something goes awry with one of your assets. That way when the time comes to retire, even if one of your investments hasn’t paid off the way you had hoped, you will still have money to support you.
- You will have multiple options during retirement for both tax-free and taxable withdrawals. This is where having your cake and eating it too comes in. Because one type or IRA is taxed on the front end (Roth IRA) and one on the back end (traditional IRA), you can look forward to enjoying both taxed and non-taxed withdrawals in retirement and not feel as if you’re taking as much of a hit every time you withdraw funds.
Pro Tip: Even if you choose to invest in both types or IRA’s, you will still be held to the IRA contribution limit, so it is important to do your homework and understand how this works. Even if you are investing in both, you can’t contribute the max amount to each one.
If you have both a Roth IRA and a traditional IRA, your “maximum contribution” is considered the total in contributions between the two. If you do happen to contribute too much and go past the limits, you will pay extra taxes—6% per year for each year the excess amounts remain in the IRA.
A bit of preparation and planning can save you from this danger—no matter when you start saving.
When to Start Saving for Retirement
While there are various answers to this question floating around the internet, the smartest time to start your retirement savings is the same for everyone. You should start saving as soon as possible.
For most people, that means starting in their 20s as soon as they land their first job. Even though the amount that they save may start small, even an initially small contribution can make a big difference over time.
If you were not able to start as early as some people were, that’s okay. It’s never too late to start saving for retirement. Just start saving as soon as you can.
Today is as good a day as any to open an IRA and begin contributing—maybe even taking advantage of catch-up contributions if you’re in the position to do so.
Developing a retirement plan and understanding your future income needs and wants are a great place to start. You can use an IRA calculator to understand what your retirement savings needs to look like if you started today. A traditional IRA contribution will also reduce your taxable income.
The Bottom Line in IRA’s
The answer to can you have both a Roth and traditional IRA is a resounding yes.
With both Roth IRA and traditional IRA’s, you can
- Save for retirement
- Enjoy tax-free investment growth
- Build more wealth than you would with a traditional savings account
While one might make more sense for you than the other right now, ultimately, in most cases, you don’t have to choose between them. Both traditional and Roth IRA’s can help you prepare for retirement, and while for some people this may be a either/or question, for others, it’s a both/and.
To learn more about which type of IRA might be right for you—or to decide whether you would be better off opening one of each—be sure to contact a financial professional here at Raiz. We can help you navigate your investment opportunities.