Are Traditional and Roth IRAs Compatible?

Maximize your retirement savings if you are qualified for both Roth and traditional IRAs. You can open an IRA even if you already have an employer-sponsored retirement plan; they are both excellent ways to save for retirement. You are allowed to open both a traditional and a Roth IRA in the same year. However, eligibility requirements and contribution caps will determine how much you can contribute to each annually. Find out what makes a Roth IRA different from a traditional IRA and whether you should contribute to or just one.

Main Points:

As long as you meet the eligibility requirements and limits, you are eligible to contribute to both types of IRAs.
After-tax funds are used to fund Roth IRA contributions. Traditional IRA contributions are typically made with pretax money.
Your 2022 IRA contribution limit is $6,000, but if you're 50 or older, you can also make an additional $1,000 catch-up contributions.
To make a Roth IRA contribution in 2022, your taxable income cannot be more than $144,000 for single filers or $214,000 for married couples filing jointly.

What Are the Differences Between Traditional and Roth IRAs?

The main difference between a Roth IRA and a traditional IRA is how the money you contribute to each is classified.

IRAs conventional:

Contributions are deductible from taxes.
When savings are withdrawn, taxes are due.
Growth and earnings are taxed when withdrawn.
By a particular year, you must start receiving the required minimum distributions.

Roth IRA:

There is no tax deduction for contributions.
At withdrawal, savings are tax-free.
If withdrawals are "qualified," earnings and growth are tax-free.
The required minimum distributions are not required of you.

After-tax funds are used to make contributions to a Roth IRA. Since you already paid tax on the money, you won't be taxed on the principal when you withdraw it in retirement. A Roth IRA allows for unlimited investment time. You are not required to start receiving required minimum distributions until a certain age (RMDs). Traditional IRA contributions are frequently made with pretax money. For those sums, you can deduct them from your taxes in the year that you earn them. Therefore, traditional IRA distributions from principal are taxable in the year you take them.

Note:

Unless you turned 70 on July 1, 2019, or later, you must take the required minimum distributions from a traditional IRA after turning 70 1/2. The SECURE Act of 2019 allows you to defer taking distributions in this situation until you are 72 years old. If distributions are eligible, money in a Roth IRA grows tax-free: You've owned the IRA for at least five years and are 59 1/2 years of age or older when you make the withdrawal.

Limits on IRA Contributions

As of 2022, whether you have one type of IRA or both, your annual maximum IRA contribution is limited to $6,000. However, if you're 50 years or older, you can make a total of $7,000 in catch-up contributions, which is an additional $1,000. This contribution cap is valid across all of your IRAs. If you have both a traditional IRA and a Roth IRA, your combined total contributions for all accounts cannot exceed $6,000 (or $7,000 for those aged 50 and over). How the contribution is distributed is up to you. Either you contribute the maximum amount to one IRA ($5,000), or you contribute $50 to a traditional IRA and the remaining $5,950 to a Roth IRA. You are in charge.

Warning:

Suppose you accidentally contribute more to an IRA than is permitted by law. In that case, you'll be subject to a 6 percent excise tax on the excess unless you realize your error and make the necessary corrections in time. Whether the income results from a wage-earning job or self-employment, anyone with taxable income during the tax year is eligible to contribute to an IRA, however, for IRA contributions, income from interest, dividends, and capital gains does not qualify as earned income. An IRA can only accept contributions equal to your annual income. If your taxable income was $4,000, you were limited to contributing $4,000 to an IRA. However, if a married person's spouse didn't make any money during the year, the married person can make contributions to a spousal IRA on their behalf.

Limits on IRA Contributions and Your Income

Income does not affect your ability to contribute to a traditional IRA; however, some high-income taxpayers have IRA contribution deduction limitations. It only affects whether you can deduct that money from your taxes. Contributions to a Roth IRA are distinct. Due to restrictions on Roth accounts, some high-income taxpayers cannot contribute to them. If you are single or file as the head of household in 2022, your taxable income cannot exceed $144,000. If you're married and file a joint return, the cap is $214,000. If your income is between $129,000 and $144,000 and you're single or the head of your household, or between $204,000 and $214,000 if you're married and file a joint return, you can contribute up to the $6,000/$7,000 cap. Only those who make less than $129,000 or $204,000 can contribute up to the total allowed amount.

Note:

In the tax year 2021, you could not have a taxable income greater than $140,000 for single filers or $208,000 for married couples filing jointly. In 2021, contribution caps for single filers (at $125,000) and joint filers (married filing jointly) (at $198,000) started to phase out or decrease. Married taxpayers who file separate returns and live with their spouses at any time during the tax year are subject to stricter limitations: they can only contribute a portion of their income, which is limited to $10,000. They are not eligible for the total $6,000 or $7,000 cap.

Are Traditional and Roth IRA Contributions Necessary?

As long as you comply with all requirements, you are eligible to contribute to both types of IRAs. If you make a traditional IRA contribution, you'll immediately benefit from tax-deductible contributions. If you make a Roth contribution, you may eventually benefit from tax-free retirement income.

Note:

Your ability to make Roth contributions may change as your income changes over time. Depending on your circumstances, you might want to fund both types of accounts or just one. Consider whether you anticipate an increase or decrease in your income over time and an increase or decrease in your tax bracket once you retire. Using this knowledge, create a few scenarios to examine the potential outcomes of your investment decisions. You can determine the best choice by performing a few straightforward calculations. Since it's difficult to predict where tax rates will go in the future, it's helpful to know that, whenever possible, you can get the most out of these account types by contributing to both a traditional and a Roth IRA.

Frequently Asked Questions (FAQs)

What are the most IRAs I can have?

Both traditional and Roth IRAs are unlimited in number. They continue to be a combined limit for all of your accounts. You might only be able to open one account per account type with one brokerage, but you can always open more accounts with another. But there is no way to circumvent the contribution caps without opening multiple traditional or Roth IRAs.

When will the IRA contribution caps for the following year be released?

The IRS typically releases inflation adjustment data in the fall. However, annual adjustments or increases to IRA contribution caps are not always made. Since 2019, the $6,000/$7,000 contribution caps have been in effect.