When it comes to retirement savings, there are two main types of accounts to choose from: Roth and traditional. Each type of account has its own unique tax advantages and disadvantages, so it’s important to understand the differences between them before deciding which one is right for you.
Roth Accounts
Roth accounts are funded with after-tax dollars, which means that you don’t get a tax deduction for your contributions. However, qualified withdrawals from Roth accounts are tax-free. This can be a major advantage in retirement, when you’re likely to be in a higher tax bracket than you are now.
Traditional Accounts
Traditional accounts are funded with pre-tax dollars, which means that you get a tax deduction for your contributions. However, withdrawals from traditional accounts are taxed as ordinary income. This can be a disadvantage in retirement, when you’re likely to be in a higher tax bracket than you are now.
Splitting Contributions
One option to consider is splitting your contributions between Roth and traditional accounts. This can allow you to get some of the benefits of both types of accounts. For example, you could contribute enough to a traditional account to get the full tax deduction, and then contribute the rest of your savings to a Roth account. This way, you’ll get some tax-free growth in your Roth account, while still getting the tax deduction for your contributions to your traditional account.
Factors to Consider
There are a few factors to consider when deciding whether or not to split your contributions between Roth and traditional accounts. These factors include:
- Your current tax bracket
- Your expected tax bracket in retirement
- Your investment goals
- Your risk tolerance
If you’re not sure whether or not splitting your contributions is right for you, it’s a good idea to talk to a financial advisor.
Splitting contributions between Roth and traditional accounts can be a good way to get the benefits of both types of accounts. However, it’s important to consider your individual circumstances before making a decision.
Additional Information
In addition to the information provided above, here are some additional resources that you may find helpful:
Frequently Asked Questions
- What is the income limit for Roth IRAs?
The income limit for Roth IRAs is $144,000 for single filers and $218,000 for married couples filing jointly.
- How do Roth IRA phase-out ranges work?
The Roth IRA phase-out ranges are $129,000-$144,000 for single filers and $204,000-$218,000 for married couples filing jointly. If your income falls within the phase-out range, you can still contribute to a Roth IRA, but your contribution will be reduced.
- Should you split contributions between a Roth and traditional account?
Whether or not you should split contributions between a Roth and traditional account depends on your individual circumstances. However, splitting contributions can be a good way to get some of the benefits of both types of accounts.
- Is pretax/traditional or after-tax/Roth better for a young person?
Roth accounts are generally better for young people because they offer tax-free growth. However, traditional accounts may be better for young people who are in a low tax bracket and expect to be in a higher tax bracket in retirement.
Why Should I Choose A Roth 401(k) Over Traditional?
FAQ
Should I do a mix of Roth and traditional?
Is it good to have both a traditional and Roth IRA?
At what point is traditional better than Roth?
Can you contribute $6000 to both Roth and traditional IRA?
Should you split 401(k) contributions between Roth & traditional?
The annual limit for all 401 (k) contributions in 2018 is $18,500. But if you are scrimping to put aside retirement funds as it is and the tax burden of going all Roth is too great now, splitting your contributions between a traditional and a Roth can be a solid choice. Do you have a question for Money Moves?
Should I split my retirement funds between a traditional and a Roth?
But if you are scrimping to put aside retirement funds as it is and the tax burden of going all Roth is too great now, splitting your contributions between a traditional and a Roth can be a solid choice. Do you have a question for Money Moves? Ask us here to be included in a future column.
Can you have a Roth IRA and a traditional IRA at the same time?
You can have both individual retirement accounts—a Roth and a traditional—at the same time. Depending on when you start, you may want to focus more on one type of retirement plan over the other. Roth IRA contributions may grow tax-free, though you won’t get any immediate tax deductions to reduce your current tax liability.
Should I split my retirement savings between a 401(k) and Ira?
For those reasons, and some others, splitting your retirement savings between a traditional 401 (k) and a Roth 401 (k) — or IRA — is sound planning. In a traditional 401 (k) you make pre-tax contributions and pay taxes in retirement when you withdraw.