If you can, it may be appropriate to contribute to both a traditional and a Roth IRA. Doing so will give you taxable and tax-free retirement options during retirement. Financial planners call this fiscal diversification, and it's usually a smart strategy when you're not sure what your fiscal outlook will be when you retire. Roth IRAs and traditional IRAs are good options for those seeking to maximize their retirement options.
You can have both retirement vehicles and contribute to each, as long as your total contribution doesn't exceed the Internal Revenue Service (IRS) limit for a given year. You can also have an IRA and participate in employer-sponsored plans, such as the 401 (k) plan, simple IRA and SEP. However, you'll need to meet specific eligibility requirements for each type. Finally, if your tax rate increases in the future or when you retire, contributing to a Roth IRA after paying taxes can increase tax diversification into your retirement savings.
While some workplaces offer a Roth 401 (k) option for employees, if yours doesn't, diverting part of those dollars from those retirement savings to a Roth IRA will give you more options for managing your tax burden during retirement. However, the amount you can contribute to a Roth IRA could be reduced or even eliminated based on your modified adjusted gross income (MAGI). The IRS also imposes income limits that determine whether traditional IRA contributions are tax-deductible if you contribute to both. There are no mandatory minimum distribution requirements for Roth IRAs during the life of the account holder; however, upon death, non-marital beneficiaries must apply for RMD.
Conversely, if you think you'll be in a lower tax bracket when you retire, a traditional IRA may be an attractive option; you get the tax benefits when you're in a relatively high tax bracket, and you can make withdrawals when you're potentially in a lower bracket. However, you'll benefit from the tax and cash flow perspective if you have a traditional IRA and a Roth IRA. As a general rule, workers who think they will be in a higher tax bracket during their careers than when they retire are advised to save on a traditional IRA. Anyone with earned income (or who has a spouse with earned income) can contribute to a traditional IRA.
If you're under 59 and a half and have a Roth IRA that withholds income from several conversions, you should keep track of the 5-year retention period for each conversion separately. You can make tax-free withdrawals as long as you are 59 and a half years old or older and have owned your Roth IRA for at least 5 years. The amount you can contribute to a Roth IRA and 401 (k) is reduced or eliminated as income increases. If you don't qualify for a Roth IRA due to income limits, some investors choose to make contributions to a traditional IRA and then convert them to a Roth IRA.
If you currently make too much money to directly fund a Roth account, you can always put that money into a traditional IRA and convert part of it into a Roth one after the fact.