Utilizing Traditional and Roth IRAs

Utilizing Traditional and Roth IRAs can help you maximize investment benefits to boost retirement savings. In this article, we will go over how you can use Traditional and Roth IRAs for a combined benefit.

The Basics

The main difference between Traditional IRAs and Roth IRAs is how you fund them. Roth IRAs are funded with after tax funds. This means you will not have to pay taxes on the principal when you take it out. On the other hand, Traditional IRAs are funded with money you have not yet paid taxes on. This means that when you take distributions those funds will be subject to taxes.

Contribution Limits

There are limits to what you can contribute. The limit is for the aggregate total contributed to both Traditional and Roth IRAs. In 2023 this limit is $6,500. However, if you are over 50 this limit is $7,500.

Income Considerations

You cannot contribute to a Roth IRA if you make too much money. If you make between $138,000 and $153,000 if you are single and between $218,000 and $228,000 if you are married, you can only contribute part of the $6,500 limitation. If you make more than $153,000 if you are single or $228,000 if you are married, you cannot make contributions to an IRA.

With Traditional IRAs you cannot deduct contributions on your taxes if you meet certain income thresholds. If you make between $73,000 and $83,000 if you are single and between $116,000 and $136,000 if you are married, you can only take a partial deduction. If you make more than $83,000 as a single individual or $136,000 as a married couple you can take no deduction.

Contribution Strategy

Which type of IRA you should contribute the most to will depend on your tax bracket in retirement. If you expect to be in a lower tax bracket because you will be subject to lower tax payments on withdrawals during retirement. On the other hand, if you expect to be in a higher tax bracket in retirement you will want to put more money in Roth IRAs. This allows you to pay lower taxes now and take tax free withdrawals when you are in a higher tax bracket.

Start Contributing Early

Part of utilizing Traditional and Roth IRAs is beginning contributions as soon as possible. Doing so allows more time for the funds to compound interest and grow. A qualified retirement planner and investment manager can help you come up with the best strategy and utilize your Traditional and Roth IRAs to the fullest.

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