Can You Have Both Traditional IRA and Roth?

Navigating the landscape of retirement savings can sometimes feel overwhelming, particularly when deciding between different types of Individual Retirement Accounts (IRAs) — Traditional and Roth. One common question that arises is whether it's possible to have both a Traditional IRA and a Roth IRA. The short answer is: Yes, you can have both. However, each type of account comes with its own set of rules, benefits, and considerations. This comprehensive guide will explore how you can manage both IRAs strategically to optimize your retirement savings.

Understanding Traditional and Roth IRAs

Traditional IRA

A Traditional IRA is a type of retirement savings account that allows you to contribute pre-tax income. This can lower your taxable income in the year you make a contribution, potentially placing you in a lower tax bracket. However, you will pay taxes on withdrawals you make during retirement.

Key Features:

• Tax Deductible Contributions: Depending on your income level and whether you are covered by a retirement plan at work, contributions to a Traditional IRA may be tax deductible.
• Required Minimum Distributions (RMDs): You must start taking distributions at age 73 (or 72 for those born before July 1, 1949).
• Contribution Limits: As of 2023, the annual contribution limit is $6,500, or $7,500 for those aged 50 or older.

Roth IRA

A Roth IRA is funded with after-tax dollars, meaning you don't get a tax deduction when you contribute. However, qualified withdrawals during retirement are tax-free, providing a significant tax advantage for those who expect to be in a higher tax bracket in retirement.

Key Features:

• Tax-Free Withdrawals: Qualified distributions are tax-free, provided the account has been open for at least five years and you are at least 59½ years old.
• No RMDs: Unlike a Traditional IRA, there are no required minimum distributions for the account holder’s lifetime, which allows more flexibility in planning when to withdraw funds.
• Contribution Limits: The contribution limits for a Roth IRA are the same as for a Traditional IRA. Eligibility to contribute depends on your Modified Adjusted Gross Income (MAGI).

Why Consider Both?

Diversification of Tax Strategy

Having both a Traditional IRA and a Roth IRA provides a hedge against the uncertainty of future tax rates. If you suspect that taxes will be higher when you retire, having a Roth IRA to draw from can be advantageous. Conversely, if taxes are lower in retirement, withdrawals from your Traditional IRA would be more beneficial. This mix allows flexibility in tax planning.

Flexibility in Retirement Spending

In retirement, unexpected expenses can arise, potentially resulting in higher taxable income. With both accounts, you can choose to draw funds from the account that provides the best tax advantage in a given year. This flexibility can help manage your tax bracket and potentially minimize taxes over time.

Estate Planning Benefits

For those focused on leaving a financial legacy, Roth IRAs are advantageous as they do not require RMDs, allowing the account to grow tax-free over time. Beneficiaries of a Roth IRA can also enjoy tax-free withdrawals over a ten-year period, maximizing what is passed down to heirs.

How to Manage Both Accounts

Determine Your Needs and Goals

• Current Tax Bracket: If you are in a high tax bracket now, you might benefit from the immediate tax deductions offered by a Traditional IRA.
• Future Tax Bracket: Consider where you think you will be in retirement. If you anticipate being in a higher bracket, a Roth IRA might be more advantageous.
• Retirement Income Sources: Think about other income streams you’ll have in retirement and how a staggered IRA withdrawal strategy might minimize your taxes.

Contribution Strategies

• Income Allocation: If eligible, you can contribute to both accounts in a year, as long as the total contribution does not exceed the IRS limit across both accounts.
• Spousal IRAs: If one spouse does not work or has low income, you can contribute to a spousal IRA on behalf of that spouse, potentially doubling how much you save each year across both accounts.

Regular Rebalancing and Review

• Account Rebalancing: Regularly review and rebalance your asset allocation within each IRA to ensure it aligns with your investment goals and risk tolerance.
• Annual Tax Planning: Revisit your tax strategy annually with the help of a financial advisor to consider the tax implications of future withdrawals and adjust your strategy accordingly.

Tax Considerations and Strategy

Phase-Out Limits

Both Traditional and Roth IRAs have income limits that might affect your ability to contribute:

• Traditional IRA Deduction Limits: These depend on whether you or your spouse is covered by a workplace retirement plan.
• Roth IRA Contribution Limits: Contributions phase out at higher income levels. For 2023, the phase-out starts at $138,000 for single filers and $218,000 for married couples filing jointly.

Conversion Strategies

You can convert a Traditional IRA to a Roth IRA, known as a Roth conversion. This involves paying taxes on the converted amount, but it can be beneficial if done strategically:

• Roth Conversion Radius: Time your conversion during lower-income years to minimize the tax impact.
• Partial Conversions: Consider converting portions over several years to spread the tax liability over time.

Practical Examples

Let’s consider a couple of scenarios to illuminate the benefits of holding both types of IRAs:

Scenario 1: Young Professional

• A young professional in their 30s, earning a steady income, anticipates being in a higher tax bracket upon retirement. They maximize contributions to a Traditional IRA for tax deductions now and slowly build a Roth IRA.
• Roth contributions are made directly, or through annual conversions, to hedge against future tax increases.

Scenario 2: Nearing Retirement

• An individual nearing retirement, with a mix of account types and a mortgage almost paid off, might focus on a Roth IRA.
• Given lower income pre-retirement, a Roth conversion may make sense to limit RMD obligations on the Traditional IRA upon reaching 73.

FAQ: Common Questions About IRAs

Is it possible to contribute to a Traditional IRA after 70½?

Yes, as of the SECURE Act enacted in December 2019, you can contribute to a Traditional IRA regardless of age, provided you have earned income.

Can I have a 401(k) and IRAs simultaneously?

Absolutely, having a 401(k) through your employer does not preclude you from contributing to a Traditional or Roth IRA.

What happens if I exceed the IRA contribution limit?

Exceeding the IRA contribution limit can result in a 6% tax penalty on the excess amount each year it remains in the account. To correct this, consider withdrawing the excess contributions before the tax filing deadline.

In Summary

Having both a Traditional IRA and a Roth IRA provides significant benefits in crafting a balanced retirement savings strategy. By understanding the nuances of each account and leveraging their benefits, you can build a flexible, tax-optimized approach that maximizes financial security in retirement. Consider consulting a financial advisor to tailor these strategies to your unique circumstances and ensure a comprehensive retirement plan.