If you're concerned about your standard of living in your golden years, you can start to boost your retirement nest egg now by depositing some cash into both a Roth and a traditional Individual Retirement Account. You can hold both a Roth and an IRA at the same institution, but there are some situations when you might benefit from spreading your accounts around between different institutions.
Roth Versus Traditional
As of 2012, yearly contributions to IRAs are capped at $5,000 for people younger than age 50 and $6,000 per year for older folks. This limit is an overall cap that applies to both your Roth and traditional IRA money whether held at one institution or between several. You fund a Roth with after-tax funds while traditional IRAs hold pre-tax contributions. You pay no taxes on Roth withdrawals if you keep the account for five years and until you reach the age of 59 1/2. Traditional IRA withdrawals are subject to income tax and withdrawals made prior to the age of 59 1/2 also incur a 10-percent tax penalty. On premature withdrawals from a Roth you pay the tax penalty and ordinary income tax on your earnings, but not your principal.
IRAs held at banks are insured by the Federal Deposit Insurance Corporation while credit union IRAs are insured by the National Credit Union Administration. These entities insure the combined balances of your Roth and traditional IRAs up to $250,000. If you have more than $250,000 between the two account types in a single institution then you risk losing some of your nest egg if that bank or credit union goes bust. You can extend your coverage by depositing some of your money in another institution since the insurance is based on a per customer, per institution basis.
Roth contributions are not tax deductible but you can only contribute to a Roth if your income remains below a certain level. If you find you can't make a full Roth contribution you can deposit your excess funds into a traditional IRA without having to drive all across town to find another bank.
Traditional IRA contributions are tax deductible and your bank or brokerage must track both your contributions and your withdrawals. For record keeping purposes, you may find it easier to hold both your Roth and your IRA at one institution. When you make taxable withdrawals, you will receive one set of tax forms from one institution which makes filing your taxes much easier.
Holding your accounts in one institution means less record keeping, less driving and less time spent choosing between different account options. However, interest rates and investment options vary from bank to bank. Just because one bank offers the best rate on fixed IRAs today it doesn't mean the same bank will offer the best deal on Roths a month or a year from now. When you stick to one institution you may not get the best bang for your buck. All in all, it's a question of prioritizing between short-term convenience and the quest for the best long-term returns.
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