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Potential benefits of having both a traditional and Roth IRA

Every year, you put money into your traditional IRA to help you get ready for retirement. But have you thought about also opening a Roth IRA? Traditional and Roth IRAs have different features and potential tax benefits, so having both could help you maximize your retirement savings. We look at three reasons to consider having a Roth IRA and things to think about when making your decision.

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.

1 Distributions from Roth accounts must be “qualified” for both the contributions and earnings to be treated as tax free. Certain conditions would apply. See your plan document for more details. In this article, all tax disclosures regarding Roth accounts are limited to the federal income-tax code and, in particular, all references to tax-free treatment of qualified distributions are intended to refer to the treatment of such distributions at the federal level only. Income-tax rules on how withdrawals are handled vary from state to state. 2 A qualified distribution from a designated Roth account in the plan is a payment made after the participant attains age 59½ (or after death or disability) and after the designated Roth account in the plan has been established for at least five years. In general, in applying the five-year rule, count from January 1 of the year the first contribution was made to the designated Roth account. Participants should contact their plan consultant or financial or tax advisor for specific details on the five-year rule and whether any special rule may apply. 3 A lifetime limit of up to $10,000 can also be withdrawn tax free for first-time home purchase (subject to requirements). 4 In general, individuals born before 12/31/1950 should be taking RMDs from their retirement accounts. The starting age is 73 for individuals born after 12/31/1950 and before 1/1/1960. Effective 1/1/2033, the RMD age is 75 for individuals born after 12/31/1959. 5 For the life of the Roth IRA account owner. 6 Modified adjusted gross income (MAGI) is the amount of money you earn each year, but with certain deductions added back in, such as student loan interest and contributions to retirement accounts.

Any tax-related discussion contained in this publication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any tax penalties or promoting, marketing, or recommending to any other party any transaction or matter addressed. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this publication.

This content is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.

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