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, since a Roth IRA is not subject to RMDs, it is possible to transfer a Roth IRA (and all the cash and assets in the account) to a beneficiary when the account owner approves.
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. In addition, there are income limits that determine whether traditional IRA contributions are tax-deductible. These limits apply to the total amount of contributions made to all of your IRAs, including Roth and traditional IRAs. 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.
However, investments and profits from a Roth IRA are tax-free and funds distributed after age 59 and a half are tax-exempt and are not taxed as ordinary income, as long as the account has been open for at least five years. The SECURE Act makes it easier for investors to save for retirement by raising the minimum age required for minimum distributions (RMD) from 70 and a half to 72 and eliminating the age restriction for contributing to a traditional IRA. You can avoid RMD by transferring a Roth 401 (k) balance to a Roth IRA after you retire, but before you reach RMD age. Meanwhile, a Roth IRA doesn't include tax-deductible contributions, but qualified withdrawals can be completely tax-free.
Distributions from a traditional IRA are considered ordinary income (thus adding the amount you distribute to your modified adjusted gross income (MAGI) levels for that year) and are taxed at your ordinary income tax rate. That's the limit of what you can bring between a traditional IRA and a Roth IRA in any given year. It's important to note that the IRA contribution limits set by the IRS each year apply to all IRAs a person may have. A traditional IRA is an individual retirement account that allows you to make pre-tax contributions (if your income is below a certain level) and not pay taxes until you withdraw the money.
In addition, traditional IRAs require the account holder to start receiving distributions at a certain age, while Roth IRAs do not.