Potential benefits of having both a traditional and Roth IRA

1 Potential for tax-free withdrawals in retirement

While your traditional IRA contributions are pretax, Roth IRA contributions are after tax. This means you’ve already paid taxes on the money, and you can take your contributions out of the account tax free at any time. Your investment earnings may also be tax free¹ if at the time of the withdrawal:

• At least five years have passed since you first contributed to your account (the five-year rule)²
• You’re age 59½ or older, or the withdrawal is made after death or disability³

If you don’t meet these requirements, you’ll have to pay federal taxes on your earnings and possibly a 10% early distribution penalty if you’re under age 59½.

The opportunity to take tax-free withdrawals in retirement can help you keep more of your hard-earned savings for the things you enjoy.

2 No required minimum distributions

Once you reach age 73, you generally have to start taking money out of your traditional IRA.⁴ These withdrawals are known as required minimum distributions (RMDs), and they’re required by the IRS to make sure you use your traditional IRA for retirement and not as a permanent tax shelter. The RMD rules don’t apply to Roth IRAs⁵ primarily because you’ve already paid taxes on your contributions. This means the money in your Roth IRA can stay invested longer, giving it more time to potentially grow.     

3 Tax diversification

Like many people, you may have opened your traditional IRA because you want to delay paying taxes until retirement when your tax rate may be lower. But what if it’s not? What if your tax rate is actually higher? There’s no way to know for certain what your future tax rate will be. That’s why some people choose to have both a traditional and Roth IRA. This strategy can give you more flexibility when accessing your retirement savings because you have tax-free and taxable income to choose from. Each year, you can decide which account you want to take money out of (your Roth IRA, traditional IRA, or both) to help you minimize your taxes. 

Additional considerations for having a traditional and Roth IRA

In addition to these potential benefits, there are other factors to consider when deciding if having both a traditional and a Roth IRA makes sense for you.

• Eligibility—To be able to contribute to a Roth IRA, your modified adjusted gross income (MAGI)⁶ must be below a certain level. For 2024, your MAGI must be less than $161,000 if you’re single or $240,000 if you're married and file a joint tax return. These limits don’t apply to your traditional IRA. If you earn too much, you might consider a Roth conversion instead, which involves moving a portion of your traditional IRA to a Roth IRA. While it’s easy enough to do, there are some important caveats. First, you’ll have to pay taxes on the amount you convert in the year the conversion takes place. For example, if you convert $5,000 of your traditional IRA in 2024, you’ll have to pay taxes on this money when you file your 2024 tax return. And you can’t change your mind. Any money you convert into a Roth IRA has to stay there. Roth conversion rules are complex, so before proceeding, you may want to speak with a financial or tax professional.      

• Cost—Your IRA provider may charge a separate fee for your Roth IRA. You’ll have to decide if the potential benefits of having two IRA accounts offset the added cost.

• IRA contribution limits—The IRS limits how much you can save in your IRA each year. For 2024, the limit is $7,000 ($8,000 if you’re age 50 or older)—and it’s a combined limit. This means that between all your IRA accounts, you can’t save more than $7,000. So if you save $3,500 in your traditional IRA, you can only save $3,500 in your Roth IRA. You can split up the $7,000 any way you want, you just can’t exceed this amount. You may want to work with a financial professional who can help you decide how much to contribute and to which type of IRA based on your financial situation and goals.

• Tax deductions—Your traditional IRA contributions may be tax deductible while Roth contributions aren’t. This difference could influence how much you contribute to each IRA. For example, if your goal is to lower your current taxable income, you might put more money in your traditional IRA to take advantage of the deduction.     

Maximizing your retirement savings with IRAs

The type of IRA you choose depends on a range of factors, including your retirement goals, your current and expected tax situation, and the availability of a workplace retirement plan. Talking through your options with a financial or tax professional can help. And remember, it doesn’t have to be an either/or decision.

Traditional and Roth IRAs are both effective ways to save for retirement, and their unique features and tax benefits can complement each other. Consider opening a Roth IRA to go with your traditional IRA. This combination could be a powerful way to help you build your retirement savings.