A surprising number of individuals have both a traditional IRA as well as a Roth IRA savings account. Most of these individuals understand that it’s important to make the maximum contributions to their accounts each and every year, but it’s not always clear whether it’s better to make those contributions to their Roth IRA or their traditional IRA. Here are some tips for helping you make that decision.
Are You Eligible to Make a Roth IRA Contribution?
A single tax filer whose modified adjusted gross income is less than $112,000 can make the maximum annual contribution to a Roth IRA. If the modified adjusted gross income is between $112,000 and $127,000, then only a partial contribution may be made. Individuals with an income over $127,000 cannot contribute to a Roth IRA in that tax year. If your income exceeds these levels, then you won’t need to decide between a Roth or traditional IRA contribution because the Roth contribution simply won’t be available to you.
Are You Eligible for a Deductible Contribution?
If you have the option to contribute to either a Roth IRA or a traditional IRA, you’ll want to consider whether you are eligible to make a deductible contribution to a traditional IRA this year. A single tax filer who is not covered by a 401(k) or other retirement plan at work will be eligible to make a deductible contribution regardless of their income level. If this individual is covered by a work retirement plan, they can make a fully deductible contribution if their modified adjusted gross income is $59,000 or less (or a partially deductible contribution if their income is between $59,000 and $69,000).
How Important is a Deductible Contribution?
Keep in mind that the lower your income, the less valuable a deductible contribution is going to be in terms of tax savings. Given the longer-term benefits of a Roth IRA, you should calculate what the current year tax savings would be for a traditional IRA contribution before you automatically assume that that’s the best decision for you.
What’s Your Marital Status?
Note that the contribution and eligibility thresholds given above are those that apply to single tax filers. Couples who file joint returns will be subject to much higher thresholds, which may affect their decision on what type of IRA to contribute to in a particular tax year.
If you don’t currently have both a traditional IRA and a Roth IRA, but you determine that the one you don’t have is a better retirement vehicle for your savings this year, then you might consider setting up a new account this year. Before you set up such an account, learn more about the advantages that a self-directed IRA can offer you going forward – regardless of whether you prefer a Roth IRA or traditional IRA structure. A custodian such as Quest Trust Company can help you learn more.
Quest Trust Company helps change people’s lives and financial future through self-directed IRA investment education. Quest Trust Company helps people invest in what they know best and build their financial future on their own terms.