Roth IRAs and traditional IRAs are great ways to save for retirement, and you can open them even if you already have an employer-sponsored retirement plan. Motivated retirement savers often ask whether they can contribute to both a Roth IRA and a traditional IRA. The answer depends on eligibility factors and contribution limitations.
Learn the differences between a Roth IRA and a traditional IRA and whether you should choose one or contribute to both at once.
- You can contribute to both types of IRAs as long as you meet the requirements.
- With a Roth IRA, contributions are made with after-tax dollars; contributions to traditional IRAs are typically made with pre-tax dollars.
- Your total IRA contributions are capped at $6,000 for 2021, but if you're age 50 or older, you're permitted another $1,000 in catch-up contributions.
- To contribute to a Roth IRA, your taxable income cannot exceed $140,000 in 2021 if you're single, or $208,000 if you're married and filing jointly.
Traditional IRAs vs. Roth IRAs: What Are the Differences?
The major distinction between Roth IRAs and traditional IRAs is the characterization of the money you contribute to each.
With a Roth IRA, contributions are made with after-tax dollars. That means you won't be taxed on the principal when you withdraw it later in retirement, because you've already paid tax on the money. You can contribute to a Roth at any age and stay invested as long as you like—there's no age at which you must take required minimum distributions (RMDs).
Contributions to traditional IRAs are typically made with pre-tax dollars. Therefore, traditional IRA distributions from principal are subject to taxation in the year you take them. However, many taxpayers can claim a tax deduction for the amount of their traditional IRA contributions.
If you have a traditional IRA, you must begin taking required minimum distributions after you reach age 70 1/2, unless your 70th birthday was July 1, 2019, or later. If it was, the SECURE Act of 2019 will allow you to wait until age 72 to start taking distributions.
IRA Contribution Limits
Your total IRA contributions, whether you have one type or IRA or both, are capped at $6,000 for 2021. However, if you're age 50 or older, you're permitted anadditional $1,000 in catch-up contributions, for a total of $7,000 for the year.
This contribution limit applies to all your IRAs combined, so if you have both a traditional IRA and a Roth IRA, your total contributions for all accounts combined can't total more than $6,000 (or $7,000 for those age 50 and up). You get to decide how to allocate the contribution, however. If you wanted to put $50 in a traditional IRA and the remaining $5,950 in a Roth IRA, you could. Or you could put the maximum amount in just one IRA.
If you make a mistake and contribute more than your legal limit, you'll have to pay a 6% excise tax on the excess, unless you catch the mistake and correct it in time.
Anyone who has earned income during the tax year can make a contribution to an IRA, whether that income is the result of a wage-earning job or through self-employment. Income from interest, dividends, and capital gains doesn't count as earned income for IRA contributions.
You can't contribute more to an IRA than you earned in a year, however. For example, if you earned $4,000 in a year, you can only put up to $4,000 in an IRA. However, a married worker can contribute to a spousal IRA on behalf of their spouse if their spouse didn't earn any income during the year.
How Income Affects IRA Contribution Limits
Although some high-income taxpayers have IRA contribution deduction limitations, income doesn't affect ability to make traditional IRA contributions. It only affects whether you can claim a tax deduction for contributing that money.
Roth IRA contributions are different, however. Certain upper-income taxpayers can't contribute to Roth IRAs due to contribution limits and restrictions associated with these accounts. If you want to contribute to a Roth IRA, your taxable income cannot exceed $140,000 in 2021 if you're single, or $208,000 in 2021 if you're married and filing jointly.
Contribution limits begin phasing out or decreasing at $125,000 for single filers and $198,000 for those married filing jointly in 2021.
Should You Contribute to a Traditional and a Roth IRA?
You can contribute to both types of IRAs as long as you meet the requirements. Contribute to a traditional IRA, and you'll reap the immediate benefits of tax-deductible contributions. When you contribute to a Roth IRA, you get the long-term benefits of tax-deferred and tax-free future income.
Because your income might change over time, affecting your eligibility to contribute to a Roth IRA, you might fund just one or both accounts, depending on your situation.
You can determine which option is better for you by running a few simple calculations. Ask yourself whether you expect your income to rise or fall over time and whether you expect your tax bracket to be higher or lower when you retire. Using that information, plot a few scenarios to see what the effects of your investment choices might be.
It's hard to predict where tax rates are headed in the future, so it helps to know that you can get the best of both account types by making contributions to both a traditional and a Roth IRA when possible.