Contribute To Both Roth And Traditional Ira - Traditional Ira

Should You Contribute To Both Roth And Traditional IRA?

Different retirement plans have various advantages and disadvantages which is why those who are eligible choose to contribute to both Roth and Traditional IRA plans. The overall allowed contribution can be shared between both a Roth and Traditional IRA plan as long as the employee is eligible to take part in both of these retirement funds. There are some differences between the two plans which is why; if possible, it can be advisable to contribute to both retirement plans.

The overall contributions for both the Roth and Traditional IRA funds are the same. For example, the contribution limit for the year 2007 in both funds is $4,000 while the catch up contributions for those over the age of 50 comes to a total of $1,000. The difference that occurs when an employee decides to contribute to both Roth and Traditional IRA plans is that the traditional plan offers tax breaks as the contributions are deductible for eligible employees.

Income and age can affect the eligibility for an employee to contribute to both Roth and Traditional IRA schemes. There are no income caps on a Traditional IRA plan but there are age limits and restrictions as opposed to a Roth fund. Required minimum distribution rules apply to Traditional IRA funds but not to a Roth plan.

Distributions from a Traditional IRA are usually treated just like an ordinary income and therefore can be subjected to regular income tax as well as early withdrawal penalties. Roth withdrawals which are qualified become tax and penalty free as long as the funds are taken more than five years after the first contribution was made, the investor reaches the age of 59 ½, the investor purchases their first home or in the unfortunate instances that the distribution is taken because the investor has become disabled or passed away. If an employee's tax bracket should increase by retirement, a Roth plan is the preferable option while if it is expected to decrease, the Traditional IRA is much better.

If an employee decides to contribute to both a Traditional IRA and a Roth retirement plan, they may decide to contribute deductible amounts only to the former and the balance to the latter plan. This tends to be the best way of taking advantage of the tax benefits of both funds and is the major reason that a person would decide to contribute to both. The short term and long term advantages should be fully researched in order to form a viable tax plan between both retirement funds. There may be extra fees due to the maintenance of two different retirement plans and this should be considered before deciding to contribute to both Roth and Traditional IRA retirement plans.

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