If you can, it may be appropriate to contribute to both a traditional and a Roth IRA. Doing so will give you taxable and tax-free retirement options during retirement. Financial planners call this fiscal diversification, and it's usually a smart strategy when you're not sure what your fiscal outlook will be when you retire. Roth IRAs and traditional IRAs are good options for those seeking to maximize their retirement options.
You can have both retirement vehicles and contribute to each one, as long as your total contribution doesn't exceed the Internal Revenue Service (IRS) limit for a given year. You can also have an IRA and participate in employer-sponsored plans, such as the 401 (k) plan, simple IRA, and SEP. However, you'll need to meet specific eligibility requirements for each type. You can contribute to both types of IRA as long as you meet all the requirements.
You'll get the immediate benefits of tax-deductible contributions if you contribute to a traditional IRA. You may get the long-term benefits of tax-free retirement income if you contribute to a Roth. Let's say you're eligible for both a Roth account and a traditional IRA. You usually do better in a traditional version if you expect to be in a lower tax bracket when you retire.
By deducting your contributions now, you reduce your current tax bill. When you retire and start withdrawing money, you'll be in a lower tax bracket, which will give the tax collector less money overall. If you expect to be in the same tax bracket or higher when you retire, you may want to consider contributing to a Roth IRA, which allows you to settle your tax bill now and not later on. No matter what stage of life you're in, it's never too early to start planning for your retirement, as even the small decisions you make today can have a big impact on your future.
While you may have already invested in an employer-sponsored plan, an Individual Retirement Account (IRA) allows you to save for your retirement in parallel and also potentially save on taxes. There are also different types of IRA, with different rules and benefits. With a Roth IRA, you contribute money after taxes, your money grows tax-free, and you can generally make tax-free and penalty-free withdrawals after age 59 and a half. With a traditional IRA, you contribute money before or after taxes, your money grows with deferred taxes, and withdrawals are taxed as current income after age 59 and a half.
The decision to invest in a traditional IRA or a Roth IRA depends on several factors, such as how much you can contribute to each of them, your long-term retirement goals, and preferred tax treatment. The main difference between a Roth IRA and a traditional IRA is the characterization of the money you contribute to each one. In addition, traditional IRAs require the account holder to start receiving distributions at a certain age, while Roth IRAs do not. Some high-income taxpayers have limits on deducting IRA contributions, but income doesn't affect their ability to make contributions to the traditional IRA.
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. Learn the differences between a Roth IRA and a traditional IRA and whether you should choose just one or contribute to both. In other words, your traditional IRA may provide a short-term tax benefit, while your Roth IRA offers another long-term tax benefit. Having a traditional IRA and a Roth IRA could allow you to enjoy a tax deduction this year by contributing to the former and making future tax-free profits with the second.
Whether your traditional IRA contributions are tax-deductible and whether you are eligible to contribute to a Roth IRA will depend on your income and other factors. .