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?
In 2021, there is also still eligibility limits for individuals to make contributions to a Roth IRA. Single taxpayers with a MAGI of $125,000 can make a full contribution, and those with a MAGI between $125,000 and $140,000 can make a lesser contribution. Married taxpayers can make full contributions where their MAGI is $181,000 (and lesser contributions for a MAGI between $198,000 and $208,000). 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. For single individuals who are covered by a plan at work for 2021, IRA contributions are fully deductible for a MAGI of up to $66,000 (with a gradual deductibility phase out between $66,000 and $76,000).
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.