Contributing to both a traditional IRA and a Roth IRA helps you hedge your bets against what tax rate you’ll fall in at retirement. However, to contribute to both account types, you have to meet both sets of eligibility requirements. If you contribute to either plan when you're ineligible, you'll owe tax penalties for excess contributions.
If you’re eligible to contribute to both types of IRA, you’ll have to split your contribution because the annual contribution limit applies to your total contributions to both traditional and Roth accounts. Each dollar that you put in a traditional IRA reduces your maximum contribution to a Roth IRA, and vice versa. For example, if your annual contribution limit is $5,000 and you put $3,000 in your traditional IRA, your maximum Roth IRA contribution is $2,000.
To contribute to either type of IRA, you must have compensation from that year. According to IRS Publication 590, compensation means money you earned from working, whether as an employee or if you’re self-employed. If you have less compensation during the year than your annual contribution limit, your total compensation becomes your annual contribution limit. For example, if your annual contribution limit would typically be $5,000, but you only have $4,500 of compensation, you can only contribute $4,500 to both types of IRAs.
Traditional IRA Age Limit
The only requirement besides having compensation you have to meet to contribute to a traditional IRA is that you have to be under 70 1/2 year old at the end of the year, regardless of when you make the contribution during the year. For example, if you don’t turn 70 1/2 until October 2014, you can’t make a contribution to a traditional IRA for the 2014 tax year, even if you make it before October.
Roth IRA Income Limit
Instead of an age limit, Roth IRAs impose an income limit: if your modified adjusted gross income is too high, you aren’t eligible to contribute to a Roth IRA. The IRS adjusts these limits annually for each filing status to account for inflation. These limits include a phase-out range, so if your income falls in the middle, your contribution limit is reduced.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."