A Roth IRA and traditional IRA sit at opposite ends of the tax shelter spectrum. Roth IRAs give you no tax breaks today but grow tax deferred. Money is withdrawn tax free at retirement. Traditional IRAs may be deductible today and grow tax deferred, but are taxable once you reach retirement. What happens if you want both the tax deduction today and the tax-free nature later? If you’re eligible and understand a few rules, contributing to both may be a good option.
Read the contribution rules for Roth IRAs on the IRS website. Roth IRA contribution limits change often, so you’ll want to make sure you qualify before trying to contribute. Type “Roth IRA contribution limits” in the search box at IRS.gov to find the maximum income you may earn and still qualify to make contributions, the contribution limit and, if you’re over age 50, additional catch-up contributions you're allowed.
Find the contribution rules for traditional IRAs on the IRS website. Although traditional IRA contributions are open to everyone, they’re only deductible if you earn under a certain income level, which changes frequently. Type “traditional IRA income limits” in the search box at IRS.gov to find current maximum income allowed. The contribution amounts will be the same as those for the Roth IRA.
Compute how much to contribute to your Roth and traditional IRAs. Your maximum contribution amount is shared between a Roth and traditional IRA, so you’ll have to sort how much you’d like in each shelter. If you can’t deduct your traditional IRA, financial website Motley Fool recommends focusing on the Roth IRA, because the Roth will grow tax free and the traditional IRA will only give your money tax-deferred treatment. Use an online IRA calculator to help formulate how much money to scoop into each plan.
Open your traditional and Roth IRAs. Mutual funds are a popular investment type in Roth and traditional IRAs but have minimum investment amounts. Use one of the many mutual fund screeners available online and sort by funds that allow small contributions. Many firms waive their minimum if you sign up to automatically save each month as little as $50.
Fund your Roth and traditional IRA accounts. Keep records of your contributions. You’ll need to remember how much you contributed to your traditional IRA. There are no filing requirements to show your Roth IRA contribution.
- How to Roll a 401(k) to a Roth IRA
- How to Make Pretax Contributions to an IRA
- How to Contribute to a 401k and IRA in the Same Year
- How to Reduce AGI in IRA
- How to Invest in Retirement Funds
- How to Make an Investment Strategy for Retirement
- Is There a Penalty for Withdrawing Your Contributions in a Roth IRA?
- Tax Implications for Contributing Too Much to a Roth IRA